Implicit Incentives and Delegation of Decision-Making Authority

This paper studies delegation of authority in a setting that combines the incentive view of delegation pioneered by Aghion and Tirole [1997], the informational theory of delegation emphasized by Dessein [2002], the learning possibility put forth by Aghion, Dewatripont, and Rey [2004] and the career concerns literature spawned by Holmström [1999]. I show that the principal may choose delegation over uninformed centralization since this allows the principal to learn about the agent’s talent, to induce the agent to become informed, and to motivate him to reveal information. Then I compare delegation with a communication equilibria in which the agent is asked by the principal to make a recommendation about which decision is best and then the principal makes the implementation decision. I show that when communication is feasible, delegation always dominates centralization with communication. Finally, I study the equilibrium when the agent can be replaced at end of the period by new agent and also study the equilibrium when outcomes are contractible.