Strategic control and strategic communication

Ricardo Alonso

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: This paper studies the optimal allocation of decision rights between an uninformed principal and an informed agent when interdependent activities need to be adapted to local conditions. While the principal cares only about overall profits the agent may favor higher, or lower, levels for each activity than the profit-maximizing level. The principal has limited commitment power and can only commit to an ex-ante allocation of decision rights. Whenever the principal retains some (or all) decision rights the agent communicates his information strategically, i.e. via cheap talk. We show that if activities are complementary the principal can always improve the informativeness of communication by sharing control with the agent, while sharing control over activities that interact as substitutes always worsens communication. As a result of this communication advantage, sharing control over complementary activities can be optimal, while control over activities that interact as substitutes is optimally allocated to the same party.

Keywords: authority; cheap talk; incomplete contracts (search for similar items in EconPapers)
JEL-codes: D23 D83 L23 (search for similar items in EconPapers)
Pages: 49 pages
Date: 2009-03
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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