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Optimal limited authority for principal

Anton Kolotilin (), Hao Li () and Wei Li

Journal of Economic Theory, 2013, vol. 148, issue 6, 2344-2382

Abstract: This article studies a principal-agent problem where the only commitment for the uninformed principal is to restrict the set of decisions she makes following a report by the informed agent. We show that an ex ante optimal equilibrium for the principal corresponds to a finite partition of the state space, and each retained decision is ex post suboptimal for the principal, biased toward the agentʼs preference. Generally an optimal equilibrium does not maximize the number of decisions the principal can credibly retain. Compared to no commitment, limited authority improves the quality of communication from the agent. As a result, it can give the principal a higher expected payoff than delegating the decision to the agent.

Keywords: Limited commitment; Cheap talk; Delegation (search for similar items in EconPapers)
JEL-codes: C72 D82 D83 L22 (search for similar items in EconPapers)
Date: 2013
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DOI: 10.1016/j.jet.2013.09.014

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