Journal Article

Optimal Delegation

Ricardo Alonso and Niko Matouschek

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 75, issue 1, pages 259-293
Published in print January 2008 | ISSN: 0034-6527
Published online January 2008 | e-ISSN: 1467-937X | DOI: http://dx.doi.org/10.1111/j.1467-937X.2007.00471.x
Optimal Delegation

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We analyse the design of decision rules by a principal who faces an informed but biased agent and who is unable to commit to contingent transfers. The contracting problem reduces to a delegation problem in which the principal commits to a set of decisions from which the agent chooses his preferred one. We characterize the optimal delegation set and perform comparative statics on the principal's willingness to delegate and the agent's discretion. We also provide conditions for interval delegation to be optimal and show that they are satisfied when the agent's preferences are sufficiently aligned. Finally, we apply our results to the regulation of a privately informed monopolist and to the design of legislatives rules.

Keywords: D82

Journal Article.  17735 words.  Illustrated.

Subjects: Information, Knowledge, and Uncertainy

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