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Optimal delegation via a strategic intermediary

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  • Liang, Pinghan

Abstract

This paper studies the optimal design of delegation rule in a three-tier principal–intermediary–agent hierarchy. In this hierarchy, monetary transfer is not feasible, delegation is made sequentially, and all players are strategic. We characterize the optimal delegation mechanism. It is shown that the single-interval delegation a la Holmstrom is optimal only when the intermediary is moderately biased. Otherwise, as responses to the distortion caused by a biased intermediary, the optimal delegation set may involve a hole. Thus, multi-interval delegation set would arise when subordinates have opposing biases. This result sheds some light on policy threshold effects: “slight” changes in the underlying state cause a jump in the policy responses.

Suggested Citation

  • Liang, Pinghan, 2013. "Optimal delegation via a strategic intermediary," Games and Economic Behavior, Elsevier, vol. 82(C), pages 15-30.
    • Handle: RePEc:eee:gamebe:v:82:y:2013:i:c:p:15-30
    DOI: 10.1016/j.geb.2013.06.008
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    Cited by:

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    3. Benita, Francisco & Nasini, Stefano & Nessah, Rabia, 2022. "A cooperative bargaining framework for decentralized portfolio optimization," Journal of Mathematical Economics, Elsevier, vol. 103(C).

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    More about this item

    Keywords

    Delegation; Intermediary; Hierarchies;
    All these keywords.

    JEL classification:

    • D73 - Microeconomics - - Analysis of Collective Decision-Making - - - Bureaucracy; Administrative Processes in Public Organizations; Corruption
    • D78 - Microeconomics - - Analysis of Collective Decision-Making - - - Positive Analysis of Policy Formulation and Implementation
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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