Delegation Using Forward Induction

This paper explores a potentially important role of delegation: as a signal to sustain cooperation in coordination games. I consider a static principal-agent model with two tasks, one of which requires cooperation between the principal and the agent. If there is asymmetric information about the agent's type, the principal with a private belief that the agent is a good type can delegate the first task as a signal of his private belief. This equilibrium is supported by the forward induction argument. I conduct laboratory experiments to test these theoretical predictions and to examine the role of information in equilibrium selection. I find that delegation is used only sometimes to facilitate cooperation; however, when the subjects have information about past sessions, there is a statistically significant increase in the use of delegation. This evidence suggests that information matters in equilibrium selection in Bayesian games.