The optimality of (stochastic) veto delegation

Xiaoxiao Hu and Haoran Lei

Papers from arXiv.org

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 {\em 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.

Date: 2022-08, Revised 2024-09
New Economics Papers: this item is included in nep-des and nep-mic
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