Shared Control and Strategic Communication

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 pro…ts the agent may favor higher, or lower, levels for each activity than the pro…t-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. Keywords: authority, cheap talk, incomplete contracts JEL classi…cations: D23, D83, L23 I am grateful to Niko Matouschek for continued guidance and support. I also thank Tilman Börgers, David Dranove, Michael Fishman, Yuk-fai Fong, Bard Harstad, Tom Hubbard, Tony Marino, John Matsusaka, Marco Ottaviani, Michael Raith, Alberto Salvo, Mark Satterthwaite, Scott Stern, Jano Zabojnik and specially Kathy Spier for their comments and suggestions. I would also like to thank seminar participants at the London Business School, Northwestern Kellogg, Rochester Simon School of Business, UCLA Anderson School of Business, University of Michigan, University of Toronto and the USC Marshall School of Business for their comments and suggestions.