Strategic Delegation By Unobservable Incentive Contracts

Many strategic interactions in the real world take place among delegates empowered to act on behalf of others. Although there may be a multitude of reasons why delegation arises in reality, one intriguing possibility is that it yields a strategic advantage to the delegating party. In the case where only one party has the option to delegate, we analyse the possibility that strategic delegation arises as an equilibrium outcome under completely unobservable incentive contracts within the class of two-person extensive form games. We show that delegation may arise solely due to strategic reasons in quite general economic environments even under unobservable contracts. Furthermore, under some reasonable restrictions on out-of-equilibrium beliefs and actions of the outside party, strategic delegation is shown to be the only equilibrium outcome.     

Monetary and fiscal institutional designs

Two investment decisions in economic institutions are feasible; investments in monetary institutions in the form of delegation of monetary policy to a more conservative or independent central bank, and investments in fiscal capacity, in the form of combating bureaucratic corruption and its consequent fiscal revenue leakages. Within this framework, we investigate the interactions among those two institutional decisions and the obtained institutional structure. The findings provide support of strategic complementarities; investments in monetary and fiscal institutions reinforce each other. In addition, we identify a set of determinants that impact on the government’s decisions to improve economic institutions, particularly, the structure and intensity of the initial corruption level, the amount of distortions caused by taxation and the policymaker’s goals and preferences across its objectives.     

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.     

Relative Performance Evaluations in a Model of Financial Intermediation

This paper focuses on the delegation by bank managers of lending decisions to their agents, typically subordinate employees of the bank. We assume that agents may base their decisions about lending to borrowers on decisions other banks have made about these same borrowers. Then we show that there exist some lazy or negligent agents who neither directly monitor the borrower nor imitate the other banks if managers use relative performance evaluations as incentive schemes. In addition, it is shown that the learning or adjustment process of agents exhibits cyclical dynamics. Journal of Economic Literature Classification Numbers: D82, D83.     

On the Delegation of Powers: With Special Emphasis on Central and Eastern Europe

Elected politicians can choose to decide themselves or to delegate competence. Delegation can occur in the constitutional stage, but is most common in the post-constitutional stage. Furthermore, domestic delegation can be distinguished from international delegation. The authors propose to analyze both delegation decisions within a unified framework and apply it to eight countries of Central and Eastern Europe that have experienced substantial constitutional change recently. The main differences among these countries with regard to delegation are portrayed, their origins are traced and their effects analyzed.     

Can trust effects on development be generalized? A response by quantile

While the beneficial effects of social trust on economic performance have been largely recognized, we analyze whether these effects can be generalized for economies at different stages of economic development. Contrary to previous studies on this issue based on average effects (mostly considering ordinary least squares estimations), we follow a quantile regression approach that enables us to capture heterogeneous effects of trust for different development levels. By considering data for 80 countries, and using trust indicators from five different waves of the World Values Survey (WVS), our results by quantile indicate that trust is not relevant for the poorest economies, showing the existence of a social poverty trap. In addition, results suggest that the impact of trust on income decreases as an economy becomes richer. This would suggest not only that trust benefits cannot be generalized for all countries, as some previous studies have proposed, but also that the extent of its implications are heavily dependent on the level of development.     

Making Good Decisions with Minimal Information: Simultaneous and Sequential Choice

The adaptive pressures facing humans and other animals to make decisions quickly can be met both by increasing internal information-processing speed and by minimizing the amount of information to be used. Here we focus on the latter effect and ask how, and how well, agents can make good decisions with a minimal amount of information, using two specific tasks as examples. When a choice must be made between simultaneously-available options, minimal information in the form of binary recognition (whether or not each item is recognized) can be used in the recognition heuristic to choose effectively. When options are encountered sequentially one at a time, minimal information as to whether or not each option is the best encountered so far is sufficient to guide agents using a simple search-cutoff rule to high performance along several choice criteria. Both of these examples have important economic as well as biological applications, and show the power of simple fast and frugal heuristics to produce good decisions with little information. This revised version was published online in August 2006 with corrections to the Cover Date.     

Optimal Delegation

We analyse the design of decision rules by a principal who faces an informed but biased agent and who is unable to commit to contingent transfers. The contracting problem reduces to a delegation problem in which the principal commits to a set of decisions from which the agent chooses his preferred one. We characterize the optimal delegation set and perform comparative statics on the principal's willingness to delegate and the agent's discretion. We also provide conditions for interval delegation to be optimal and show that they are satisfied when the agent's preferences are sufficiently aligned. Finally, we apply our results to the regulation of a privately informed monopolist and to the design of legislatives rules.     

Exploring the role of human resources in technology out-licensing:an empirical analysis of biotech newtechnology-based firms

Out-licensing is a technology exploitation option to generate revenues without investing in downstream complementary assets. Despite its increasing strategic relevance, the strong complexity of out-licensing activity determines a substantial discrepancy in firms’ ability to extract monetary benefits from this practice. Searching for determinants of out-licensing performance, the paper focuses in particular on the role of licensing managers. Based on a multiple case study analysis involving 26 out-licensing deals executed in seven Italian biotech NTBFs, the study shows that expert scientific skills, extensive licensing practice and prior employment in multinationals, but not an intense social network, characterise successful licensing managers, while high delegation and powerful intrinsic rewards enable individual capacities of licensing managers to translate into actual economic value.     

The politics of special purpose trust funds

Over the last decades, bilateral donors of foreign aid have increased their use of special purpose trust funds to provide earmarked aid to multilateral organizations. This paper investigates the incentives and consequences underlying this recent shift toward country‐ or theme‐specific funding and away from bilateral and multilateral aid. We propose a game‐theoretic model with multiple principals and a multilateral agent to study how the interaction between donor preferences, voter concerns in the donor country, the voting rules at the multilateral organization, and the presence of special purpose trust funds influences aid allocation. We show that multilateral organizations with majority rules are more likely to receive discretion and thus voluntary core contributions than those with unanimity requirements and that the possibility of earmarking multilateral aid decreases donors’ contributions to the multilateral's discretionary core budget and the amount of bilateral aid. In contrast to much of the literature dealing with issues of delegation and bi‐ and multilateral aid, our model suggests non‐monotonic effects of preference heterogeneity on the choice of aid channel for some parameter combinations when contributions to special purpose trust funds are an option.     

论东亚地区社会信任与经济增长的正相关效应

越来越多的研究表明社会信任是解释经济增长的一个重要变量。不过一般认为华人社会是一个低信任度的社会。但WSV的调查数据证明不仅华人社会，而且整个东亚地区中那些在近40年经历了快速增长的经济体中都有非常高的信任度，这种信任也是这一地区经济增长的源泉。     

Social norms, information, and trust among strangers: theory and evidence

Can a social norm of trust and reciprocity emerge among strangers? We investigate this question by examining behavior in an experiment where subjects repeatedly play a two-player binary “trust” game. Players are randomly and anonymously paired with one another in each period. The main questions addressed are whether a social norm of trust and reciprocity emerges under the most extreme information restriction (anonymous community-wide enforcement) or whether trust and reciprocity require additional, individual-specific information about a player’s past history of play and whether that information must be provided freely or at some cost. In the absence of such reputational information, we find that a social norm of trust and reciprocity is difficult to sustain. The provision of reputational information on past individual decisions significantly increases trust and reciprocity, with longer histories yielding the best outcomes. Importantly, we find that making reputational information available at a small cost may also lead to a significant improvement in trust and reciprocity, despite the fact that most subjects do not choose to purchase this information.     

Trust as belief or behavior?

Despite its proposed importance for economic performance, there seems to be little agreement on what trust really is. In economics, trust is generally viewed as a belief regarding the action that is to be expected from others. This contrasts with the view that trust is a way of acting. In his influential book on the nature of explanation in the social sciences, Jon Elster argues that trusting is to act with few precautions. I argue that it is possible to reconcile these seemingly conflicting views about trust. I develop a simple model of trust where both beliefs and precautions play an important role – and where Elster’s understanding of trust can be viewed as a special case.     

Opacity in bargaining over public good provision

We consider ultimatum bargaining over the provision of a public good. Offer-maker and responder can delegate their decisions to agents whose actual decision rules are opaque. We show that the responder will benefit from strategic opacity, even with bilateral delegation. The incomplete information created by strategic opacity choices does not lead to inefficient negotiation failure in equilibrium. Inefficiencies arise from an inefficient provision level. While an agreement will always be reached, the public good provision will fall short of the socially desirable level. Compared with unilateral delegation, bilateral delegation is never worse from a welfare perspective.     

Cooperation,Trust and Economic Development: An Experimental Study in China

Many previous empirical studies have suggested that cooperation and trust affect economic growth. However, the precise relationship between trust and cooperation (i.e. whether trust leads to cooperation or cooperation leads to trust) remains unclear and it is not known how the level of economic development affects the level of cooperation and trust. Using a combination of public goods, gambling game and trust game experiments, we investigate the links among cooperation, trust and economic development in four regions of China. Our results suggest that, first, there is a U‐shaped or V‐shaped relationship between cooperation and economic development. Second, on the one hand, cooperation leads to trust, and on the other hand, more cooperative behaviour may be created by rewarding trusting behaviour. Third, men are more cooperative and trusting than women. Furthermore, we find that the widely used ‘GSS trust’ question from the General Social Survey (GSS) does not predict either cooperation or trust, whereas the questions ‘GSS fair’ and ‘GSS help’ have weak predictive power for trusting behaviour but not for cooperative behaviour.     

Strategic Delegation of Multiple Tasks

This paper studies both the owner–manager relationship and the union–firm relationship in a model of unionised duopoly to analyse whether a firm's owner delegates the task of wage bargaining to a manager along with the task of output determination. We also analyse the profit and welfare effects of multiple‐task delegation. It has been shown in the literature that, when there is only one delegation task – output determination – delegation of output decisions to managers leads to lower profits for owners than non‐delegation as pure profit‐maximisation. However, when there are two delegation tasks as in our model – output determination and wage bargaining – we show that owners are better off delegating both tasks than delegating only the output decision or not delegating at all. This result provides a rationale and managerial insight for strategically delegating multiple tasks to managers. Moreover, we show that union utility, consumer surplus and social welfare are all higher when owners do not delegate the task of wage bargaining than when they do. This result suggests that governments implement union contracts that require owners, rather than managers, to negotiate wages with unions in order to benefit unions and consumers and to improve social welfare as well.     

转型期中国县级政府的客观治理绩效与政治信任——从“经济增长合法性”到“公共产品合法性”

善治是中国政府的执政要务,政治信任反映着公民对政府治理的认可和支持。文章利用2008年中国公民意识调查及政府统计数据,实证分析了政府治理绩效的主观和客观维度对政治信任的影响。研究发现,公民对政府在经济增长、民生福利、纯公共产品领域治理绩效的回顾性和前瞻性积极评价都正相关于政治信任;纯公共产品提供的主观评价对政治信任的影响大于经济增长和民生福利。县级政府的客观治理绩效对政治信任有重要影响,在高人均福利支出、低基尼系数和低失业率的县级单位,政治信任更高,而人均GDP反而微弱地负作用于政治信任。因此,尽管经济增长仍然是政治信任的重要来源,但民生福利和纯公共产品正赶上并超越经济增长,成为公民提供政治信任的新源泉。     

Delegation of Decision-Rights for Wetlands

Different nutrient abatement activities jointly determine water quality. Policies are determined by governments at central and local level, implying that decisions can be affected by strategic considerations. In this article, decentralization of wetland policies is analyzed with regard to the environmental and economic consequences. A two-stage game is used to investigate strategic abatement decisions regarding nitrogen fertilizer reductions, waste water treatment plant phosphorus reductions and wetlands, assuming that wetland decision can be decentralized. It is shown that under particular circumstances, strategic consideration may imply that a central government undertakes more abatement than socially optimal, but in most cases the opposite is likely to occur. Decentralization of wetland decisions is advantageous to the central government but only benefits the local government if its wetland technology is considerably more efficient that the central government’s. This paper explains why local governments often hesitate to take on additional responsibilities for environmental management, and identifies conditions under which local governments make smaller losses or even gain from delegation. The results also contribute to understanding how strategically optimal matching grants are chosen when governments only take into account their own direct costs of abatement and the central government needs to satisfy the local government’s participation constraint.     

It takes two to cheat: An experiment on derived trust

Social life offers innumerable instances in which trust decisions involve multiple agents. Of particular interest is the case when a breach of trust is not profitable if carried out in isolation, but requires an agreement among agents. In such situations the pattern of behaviors is richer than in dyadic games, because even opportunistic trustees who would breach trust when alone may act trustworthily based on what they believe to be the predominant course of action. Anticipating this, trusters may be more inclined to trust. We dub these motivations derived trustworthiness and derived trust. To capture them, we design a “Collective Trust Game” and study it by means of a laboratory experiment. We report that overall levels of trustworthiness are almost thirty percentage points higher when derived motivations are present, and this generates also higher levels of trust. In our set-up, the effects of derived trustworthiness are comparable in size to positive reciprocity, and more important than concerns for equality.     

Variable temptations and black mark reputations

Reputations often guide sequential decisions to trust and to reward trust. We consider situations where each player is randomly matched with a partner in every period. One player – the truster – decides whether to trust. If trusted, the other player – the temptee – has a temptation to betray. The strength of temptation, private information to the temptee, varies across encounters. Betrayals are recorded as publicly known black marks. First, we identify equilibria when players only condition on the number of a temptee's black marks. Second, we show that conditioning on the number of interactions as well as on the number of black marks does not prolong trust. Third, we examine stochastic variations where black marks may be forgotten. Perhaps surprisingly, such variations do not improve outcomes. Fourth, when players condition on more general summary statistics of a temptee's past, we study equilibria where trust is suspended temporarily.