DP4870 Relational Delegation

Author(s): Ricardo Alonso, Niko Matouschek
Publication Date: January 2005
Keyword(s): cheap talk, delegation, relational contract
JEL(s): D23, D82, L23
Programme Areas: Industrial Organization
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=4870

We explore the optimal delegation of decision rights by a principal to a better informed but biased agent. In an infinitely repeated game a long-lived principal faces a series of short-lived agents. Every period they play a cheap talk game a la Crawford and Sobel (1982) with constant bias, quadratic loss functions and general distributions of the state of the world. We characterize the optimal delegation schemes for all discount rates and show that they resemble organizational arrangements that are commonly observed, including centralization and threshold delegation. For small biases threshold delegation is optimal for almost all distributions. Outsourcing can only be optimal if the principal is sufficiently impatient.