Reputation versus information: The delegation policy when the principal has reputational concerns

We analyze the delegation policy when the principal has reputational concerns. Both the principal and the agent can be either good or biased; the good players prefer the correct decision, while the biased ones prefer a high action even though it may be wrong. An evaluator who forms the principal's reputation may or may not be able to observe who makes the decision. When the evaluator cannot observe the allocation of authority, the principal shares the credit and blame with the agent. Although delegation can improve the quality of decision making because the agent has better information, it may also hurt the good principal's reputation because the high action may be taken by the biased agent while the blame will be shared when it is wrong. Thus, the good principal has a tendency to keep too much authority to maintain her reputation. By contrast, when the evaluator can observe the allocation of authority, delegation becomes a signaling device for the good type of principal to differentiate herself from the biased one. This results in an excessive allocation of authority toward the agent.     

Message-contingent delegation

The paper studies the role of delegation and authority in a principal-agent relation in which a non-contractible action has to be taken. The agent has private information relevant for the principal, but has policy preferences different from the principal. Consequently, an information revelation problem arises. I consider a partially incomplete contracting environment with contractibility of messages and decision rights and with transferable utility. I contribute to the literature by allowing for message-contingent delegation and by deriving the optimal partially incomplete contract. It is shown that message-contingent delegation creates incentives for information revelation and may outperform unconditional authority and unconditional delegation.     

“Timing Is Everything” and Marital Bliss

We first show that in a marriage market, when the stability of a matching is disturbed when a new agent joins the game, natural greedy behavior defines an equilibration procedure that converges to a stable matching for the extended problem. We then consider the iterative procedure under which agents join the game sequentially, and the natural greedy procedure is applied after the entrance of each agent. It is shown that this procedure converges to a stable matching for the original (global) problem and that for each agent, if the order of all other agents is given, he/she weakly improves his/her final outcome by deferring his/her arrival time. The agent that arrives last gets his/her optimal outcome under stable matchings. Journal of Economic Literature Classification Numbers: C78, C62.     

Credible delegation

We show that the vertical delegation of decision-making authority to agent firms can act as a credible strategic commitment even when contracts are unobservable (or renegotiable) if and only if multilateral delegation is combined with decentralized ownership of the agent firms. In this case, the possibility of renegotiation of other agents’ contracts constrains the set of contracts acceptable to each agent. Delegation may induce more or less aggressive behavior, depending on the nature of within-structure competition among the agent firms. Thus, delegation may be a valuable, credible strategic commitment mechanism when strategies are either substitutes or complements.     

Authority and Communication in Organizations

This paper studies delegation as an alternative to communication. We show that a principal prefers to delegate control to a better informed agent rather than to communicate with this agent as long as the incentive conflict is not too large relative to the principal's uncertainty about the environment. We further identify cases in which the principal optimally delegates control to an "intermediary", and show that keeping a veto–right typically reduces the expected utility of the principal unless the incentive conflict is extreme.     

Delegation and commitment in durable goods monopolies

This paper studies a simultaneous-move infinite-horizon delegation game in which the principal of a durable goods monopoly entrusts pricing decisions to a manager who enjoys consuming her monetary rewards but dislikes production effort. The delegation contract allows for continual interference with managerial incentives: in each period the principal rewards the manager according to her performance. We show that when the cost of delegation is low relative to profits, the principal can attain the precommitment price plan in a perfect rational expectations equilibrium. The paper analyzes the robustness of this result under alternative specifications of timing and objectives. We also provide a numerical characterization of the equilibrium strategies for the case of linear-quadratic payoffs.     

The Importance of Bureaucratic Hierarchy: Conflicting Preferences,Incomplete Control,and Policy Outcomes

Existing theories of legislative delegation feature spatial models in which a principal chooses a single agent to whom to delegate authority. In the canonical model, the ally principle holds – the principal picks the ideologically closest agent. However, elected politicians typically decide whether to delegate not to an individual but to an institution, which consists of many individuals with differing preferences. To improve on existing work, we model delegation with bureaucratic hierarchy. Our results show that hierarchy is sufficient to undercut the ally principle. Indeed, capturing the logic of delegation and its results requires incorporating agency structure, especially the costs of an agency head controlling her subordinates resulting in incomplete control, as different structures are associated with different policy outcomes even when the same people constitute a bureaucracy. We also demonstrate that integrating hierarchy has important implications for a wide range of considerations, such as agency structural choice and the measurement of agency ideal points.     

Unmediated communication in games with complete and incomplete information

We study the effects of adding unmediated communication to static, finite games of complete and incomplete information. We characterize S^U(G), the set of outcomes of a game G, that are induced by sequential equilibria of cheap talk extensions. A cheap talk extension of G is an extensive-form game in which players communicate before playing G. A reliable mediator is not available and players exchange private or public messages that do not affect directly their payoffs. We first show that if G is a game of complete information with five or more players and rational parameters, then S^U(G) coincides with the set of correlated equilibria of G. Next, we demonstrate that if G is a game of incomplete information with at least five players, rational parameters and full support (i.e., all profiles of types have positive probability), then S^U(G) is equal to the set of communication equilibria of G.     

Co-ordination, Spillovers, and Cheap Talk

We analyze the role of cheap-talk in two player games with one-sided incomplete information. We identify conditions under which (1) players can fully communicate and coordinate on efficient Nash equilibria of the underlying complete information game; and (2) players cannot communicate so cheap-talk does not alter the equilibrium set of the Bayesian game. We present examples that illustrate several issues that arise when there is two-sided incomplete information. Journal of Economic Literature Classification Numbers: C72, D82.     

Belief-Based Equilibria in the Repeated Prisoners' Dilemma with Private Monitoring

We analyze repeated prisoners' dilemma games with imperfect private monitoring and construct mixed trigger strategy equilibria. Such strategies have a simple representation, where a player's action only depends upon her belief that her opponent(s) are continuing to cooperate. When monitoring is almost perfect, the symmetric efficient outcome can be approximated in any prisoners' dilemma game, while every individually rational feasible payoff can be approximated in a class of such games. The efficiency result extends when there are more than two players. It requires that monitoring be sufficiently accurate but does not require very low discounting when a public randomization device is available. Journal of Economic Literature Classification Numbers: C73, D82.     

Bayesian consistent belief selection

A subjective expected utility agent is given information about the state of the world in the form of a set of possible priors. She is assumed to form her beliefs given this information. A set of priors may be updated according to Bayes' rule, prior-by-prior, upon learning that some state of the world has not obtained. In a model in which information is completely summarized by this set of priors, we show that there exists no decision maker who obeys Bayes' rule, conditions her prior only on the available information (by selecting a belief in the announced set), and who updates the information prior-by-prior using Bayes' rule.     

Persuasion and learning by countersignaling

We model countersignaling (i.e., very high types refraining from signaling) arising from the tradeoff between persuasion and learning in a signaling game. We assume that the agent has imperfect private information regarding his/her productivity, which the signaling action provides additional verifiable information about. A higher-type agent benefits more from providing such objective, albeit imprecise, “proof” for the market, but may also gain less from learning about his/her productivity. When the latter effect dominates the former for the very high types, the equilibrium exhibits countersignaling: very high and low types pool on refraining from signaling, and only the medium types signal. Under certain conditions, the countersignaling equilibrium is the unique pure-strategy perfect sequential equilibrium.     

Garbling of signals and outcome equivalence

In a game with incomplete information players receive stochastic signals about the state of nature. The distribution of the signals given the state of nature is determined by the information structure. Different information structures may induce different equilibria.Two information structures are equivalent from the perspective of a modeler, if they induce the same equilibrium outcomes. We characterize the situations in which two information structures are equivalent in terms of natural transformations, called garblings, from one structure to another. We study the notion of ‘being equivalent to’ in relation with three equilibrium concepts: Nash equilibrium, agent normal-form correlated equilibrium and the belief invariant Bayesian solution.     

部分契约、控制权转移与揭示机制

区别于完全契约和不完全契约理论,基于对名义控制权和实际控制权的区分,Aghion等(2002;2003)提出部分契约概念,强调代理人人力资本的重要性和实际控制权的可转移性.在此基础上,我们放松Aghion等(2003)的研究假设,基于贝叶斯法则对该理论做一般化分析并对不同状态下转移控制机的机制效力进行比较.我们强调在更一般的情况下,除了引人价格机制以外,引入声誉作为保障该信息揭示机制效力的激励约束机制是必要的且比价格机制列为适用.该理论对于解释信誉,授权等理论问题,以及指导中国公司治理实践具有参考价值.     

RANDOM AUTHORITY

This article rationalizes matrix management in a multiproject organization in which decisions must be adapted to local conditions but also coordinated with each other. Project managers are privately informed about local conditions and communicate strategically via cheap talk. Matrix management is modeled as a randomization over deterministic authority allocations. We show that random authority is strictly optimal when the conflict between adaptation and coordination is very severe or the coordination need is very small. Moreover, the optimal degree of delegation changes nonmonotonically in the coordination need when the incentives of the project managers are sufficiently aligned.     

Adaptive contracting: the trial-and-error approach to outsourcing

Summary. Adaptive contracting occurs when a principal experiments with the delegation of authority through leaving contracts incomplete. We highlight two potential benefits of adaptive contracting: First, the delegation of authority can be advantageous even if the agent acts opportunistically, since expected private benefits will be shared between the parties through price negotiation. Second, the principal extracts information from experimenting with delegation of authority and we identify a positive option value embodied in the principals ability to extend or withdraw the delegated authority in future contracting periods.Received: 14 April 2003, Revised: 26 January 2004, JEL Classification Numbers: D72, L33, L97.We thank John Sørensen and Henrik Severin Hansen for introducing us to the contractual and economical issues in local bus outsourcing in Denmark, Oliver Hart and Antonio Rangel for early discussions on adaptive contracting and Christian Aastrup for research assistance. We are grateful to Danish Transportation Research Institute (www.dtf.dk) for comments and financial support for this project.     

Informed principal with correlation

In this paper we analyze an adverse selection model with one principal and one agent, who are both risk neutral and have private information. We assume that the private information of the principal is correlated with that of the agent. The main result of the paper is that the principal can extract a larger share of the surplus from the agent than in the case where her information is public. The principal can design such a contract because she exploits the fact that her type is an informative signal on the agent's one. We fully characterize the equilibrium of the game in which different types of principal offer the same menu of contracts that leaves the agent uninformed about the principal's type. This gives more freedom to the principal when setting the transfers because the agent's constraints need to hold only at an interim stage.     

Indirect higher order beliefs and cooperation

This study experimentally examines the role of indirect higher order beliefs in sequential psychological games. We consider a three-player sequential game in which the first and third players do not interact sequentially, but only through an intermediary, the second player. We posit that the third player’s decision to cooperate depends on his indirect higher order belief, namely, his belief about what the first player believes the second player would choose. We employ pre-play communication between the first and third players as a way to influence the third player’s indirect higher order belief. The evidence demonstrates that communication can effectively induce cooperation from the third player by shaping his indirect higher order belief.     

Social memory,evidence, and conflict

This paper examines an equilibrium model of social memory — a society's vicarious beliefs about its past. We show that incorrect social memory is a key ingredient in creating and perpetuating destructive conflicts.We analyze an infinite-horizon model in which two countries face off each period in a game of conflict characterized by the possibility of mutually destructive “all out war” that yields catastrophic consequences for both sides. Each country is inhabited by a dynastic sequence of individuals. Each individual cares about future individuals in the same country, and can communicate with the next generation of their countrymen using private messages. Social memory is based on these messages, and on physical evidence — a sequence of imperfectly informative public signals of past behavior. We find that if the future is sufficiently important for all individuals, then regardless of the precision of physical evidence from the past there is an equilibrium in which the two countries engage in all out war with arbitrarily high frequency, an outcome that cannot arise in the standard repeated game. In our construction, each new generation “repeats the mistakes” of its predecessors, leading to an endless cycle of destructive behavior.Surprisingly, we find that degrading the quality of information that individuals have about current decisions may “improve” social memory. This in turn ensures that arbitrarily frequent all out wars cannot occur.     

Communication in bargaining over decision rights

This paper develops a model of bargaining over decision rights between an uninformed principal and an informed but self-interested agent. We introduce two different bargaining mechanisms: tacit and explicit bargaining. In tacit bargaining, an uninformed principal makes a take-it-or-leave-it price offer to the agent, who then decides whether to accept or reject the offer. In the equilibrium of the game, the principal inefficiently screens out some agent types so that the agent's private information cannot be fully utilized when the decision is made. In explicit bargaining in which parties can communicate explicitly via cheap talk before tacit bargaining, however, an equilibrium with no such inefficient screening exists even when the conflict of interest is arbitrarily large. We also follow a mechanism design approach, showing that under certain conditions, explicit bargaining is an optimal bargaining mechanism that maximizes the joint surplus of the parties.