The optimality of (stochastic) veto delegation

Xiaoxiao Hu and Haoran Lei

Games and Economic Behavior, 2025, vol. 150, issue C, 215-234

Abstract: We analyze the optimal delegation problem between a principal and an agent, assuming that the latter has state-independent preferences. We demonstrate that if the principal is more risk-averse than the agent toward non-status quo options, an optimal mechanism is a veto mechanism. In a veto mechanism, the principal uses veto (i.e., maintaining the status quo) to balance the agent's incentives and does not randomize among non-status quo options. We characterize the optimal veto mechanism in a one-dimensional setting. In the solution, the principal uses veto only when the state surpasses a critical threshold.

Keywords: Optimal delegation; Veto delegation; Stochastic mechanism (search for similar items in EconPapers)
JEL-codes: D72 D82 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:gamebe:v:150:y:2025:i:c:p:215-234

DOI: 10.1016/j.geb.2024.12.003

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