FS IV 02 – 26 Delegation versus Authority

Delegation versus Authority by Daniel Krähmer The paper studies the role of delegation and authority within a principal-agent relation in which a non-contractible action has to be taken. The agent has private information relevant for the principal, but has policy preferences different from the principal. Consequently, an information revelation problem arises. We contribute to the literature by assuming transferable utility and contractibility of messages and decision rights. While delegation leads to loss of control, it facilitates the agent’s participation and leads to an informed decision. Moreover, message-contingent delegation creates incentives for information revelation. We derive the optimal contract for the principal and investigate when delegation outperforms authority.