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Strategic control and strategic communication

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  • Alonso, Ricardo

Abstract

This paper studies the optimal allocation of decision rights between an uninformed principal and an informed agent when interdependent activities need to be adapted to local conditions. While the principal cares only about overall profits the agent may favor higher, or lower, levels for each activity than the profit-maximizing level. The principal has limited commitment power and can only commit to an ex-ante allocation of decision rights. Whenever the principal retains some (or all) decision rights the agent communicates his information strategically, i.e. via cheap talk. We show that if activities are complementary the principal can always improve the informativeness of communication by sharing control with the agent, while sharing control over activities that interact as substitutes always worsens communication. As a result of this communication advantage, sharing control over complementary activities can be optimal, while control over activities that interact as substitutes is optimally allocated to the same party.

Suggested Citation

  • Alonso, Ricardo, 2009. "Strategic control and strategic communication," LSE Research Online Documents on Economics 58682, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:58682
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    File URL: http://eprints.lse.ac.uk/58682/
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    References listed on IDEAS

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    Cited by:

    1. Nemanja Antić & Nicola Persico, 2020. "Cheap Talk With Endogenous Conflict of Interest," Econometrica, Econometric Society, vol. 88(6), pages 2663-2695, November.

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    More about this item

    Keywords

    authority; cheap talk; incomplete contracts;
    All these keywords.

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production

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