Informal Delegation and Training

This paper investigates the relationship between the firm’s incentives to provide training and to delegate authority. We consider a principal-agent model in which the firm is not able to commit to delegation contractually and the conflict of interest between the firm and the worker arises both because the latter is biased towards certain decisions and because players interpret information differently (i.e., they have differences of opinion). Our theoretical analysis consists of two parts. First, we examine the equilibrium behavior when the degree of incongruence between the firm and the worker is public information. Second, we analyze the equilibrium behavior when the firm is privately informed about its type wherein the type refers to the level of differences in opinion between the firm and the worker. This exercise shows the extent to which the firm can use training provision to convey its private information to the worker, thereby committing not to retract the agent’s authority it initially granted. In our empirical analysis, we use a cross section of matched employer-employee data of British establishments to examine the extent to which the model’s predictions are supported by data.