Repeated Delegation

Elliot Lipnowski and João Ramos
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Elliot Lipnowski: University of Chicago

No 1292, 2018 Meeting Papers from Society for Economic Dynamics

Abstract: We study an ongoing relationship of delegated decision making. Facing a stream of projects to potentially finance, a principal must rely on an agent to assess the returns of different opportunities; the agent has lower standards, wishing to adopt every project. In equilibrium, the principal allows bad projects in the future to reward fiscal restraint by the agent today, but she cannot commit to reward the agent indefinitely. We fully characterize the equilibrium payoff set (at fixed discounting), showing that Pareto optimal equilibria can be implemented via a two-regime ‘Dynamic Capital Budget’. We show that, rather than backloaded rewards—a prevalent feature of dynamic agency models with greater commitment power—our Pareto optimal equilibria feature an inevitable loss of autonomy for the agent as time progresses. This transition toward conservatism speaks to the life cycle of an organization: as it matures, it generates lower revenue at a higher yield.

Date: 2018
New Economics Papers: this item is included in nep-mic and nep-ppm
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Journal Article: Repeated delegation (2020)
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