Delegation with Endogenous States

Dino Gerardi, Lucas Maestri and Ignacio Monzon

No 18885, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We present a model of delegation with moral hazard. A principal delegates a decision to an agent, who affects the distribution of the state of the world by exerting costly and unobservable effort. The principal faces a trade-off between (i) granting the agent discretion, so he can adapt the decision to the state and (ii) limiting the agent's discretion, to induce him to exert effort. Our model is flexible on how effort affects the state distribution, thus capturing several distinct economic environments. Optimal delegation takes one of four simple forms, all commonly used in practice: floors, ceilings, floor-ceilings or gaps.

Keywords: Delegation; Moral hazard; Gaps; Ceilings; Caps; endogenous state; Floors (search for similar items in EconPapers)
JEL-codes: C70 C78 D82 (search for similar items in EconPapers)
Date: 2024-03
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Working Paper: Delegation with Endogenous States (2024)
Working Paper: Delegation with Endogenous States (2023)
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