Equilibrium Informativeness in Veto-Based Delegation

Eric Schmidbauer (eschmidb@ucf.edu) and Dmitry Lubensky (dmitry.lubensky@gmail.com)
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Eric Schmidbauer: University of Central Florida, Orlando, FL

No 2016-03, Working Papers from University of Central Florida, Department of Economics

Abstract: In veto delegation a biased expert recommends an action that an uninformed decision maker can accept or reject for an outside option. The arrangement is ubiquitous in political institutions, corporations, and consumer markets but has seen limited use in applications due to a poor understanding of the equilibrium set and an ensuing debate over selection. We develop a simple algorithm that constructs every veto equilibrium and identify the most informative equilibrium in a setting that spans prior work. We show that Krishna and Morgan’s (2001) and Mylovanov’s (2008) equilibria are maximally informative in their respective settings and strengthen Dessein’s (2002) comparison of full and veto delegation. In an application we study the relationship between a patient and a doctor with a financial incentive to overtreat, and in contrastwith existing literature showthat the doctor’s bias harms the patient both through excessive treatment and information loss, that the latter can be the dominant effect, and that insurance benefits both parties by improving communication.

Keywords: veto-based delegation; cheap talk; physician-induced demand; noncompliance (search for similar items in EconPapers)
JEL-codes: D82 I10 (search for similar items in EconPapers)
Pages: 50 Pages
Date: 2016-09
New Economics Papers: this item is included in nep-mic
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