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Delegation with Endogenous States

Author

Listed:
  • Dino Gerardi

    (Collegio Carlo Alberto/University of Turin)

  • Lucas Maestri

    (FGV EPGE - Escola Brasileira de Economia e Finanças)

  • Ignacio Monzón

    (Collegio Carlo Alberto/University of Turin)

Abstract

We present a model of delegation with moral hazard. A principal delegates a decision to an agent, who affects the distribution of the state of the world by exerting costly and unobservable effort. The principal faces a trade-off between (i) granting the agent discretion, so he can adapt the decision to the state and (ii) limiting the agent’s discretion, to induce him to exert effort. Our model is flexible on how effort affects the state distribution, thus capturing several distinct economic environments. Optimal delegation takes one of four simple forms, all commonly used in practice: floors, ceilings, floor-ceilings or gaps.

Suggested Citation

  • Dino Gerardi & Lucas Maestri & Ignacio Monzón, 2024. "Delegation with Endogenous States," Working Papers 309, Red Nacional de Investigadores en Economía (RedNIE).
    • Handle: RePEc:aoz:wpaper:309
    as

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    File URL: https://rednie.eco.unc.edu.ar/files/DT/309.pdf
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    References listed on IDEAS

    as
    1. Inga Deimen & Dezső Szalay, 2019. "Delegated Expertise, Authority, and Communication," American Economic Review, American Economic Association, vol. 109(4), pages 1349-1374, April.
    2. Marina Halac & Pierre Yared, 2014. "Fiscal Rules and Discretion Under Persistent Shocks," Econometrica, Econometric Society, vol. 82, pages 1557-1614, September.
    3. Manuel Amador & Kyle Bagwell, 2013. "The Theory of Optimal Delegation With an Application to Tariff Caps," Econometrica, Econometric Society, vol. 81(4), pages 1541-1599, July.
    4. Martimort, David & Semenov, Aggey, 2006. "Continuity in mechanism design without transfers," Economics Letters, Elsevier, vol. 93(2), pages 182-189, November.
    5. Nahum D. Melumad & Toshiyuki Shibano, 1991. "Communication in Settings with No. Transfers," RAND Journal of Economics, The RAND Corporation, vol. 22(2), pages 173-198, Summer.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    delegation; moral hazard; endogenous state; floors; ceilings; caps; gaps;
    All these keywords.

    JEL classification:

    • C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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