Contracting for Information Under Imperfect Commitment

Organizational theory suggests that authority should lie in the hands of those with information, yet the power to transfer authority is rarely absolute in practice. We investigate the validity and application of this advice in a model of optimal contracting between an uninformed principal and informed agent where the principal's commitment power is imperfect. We show that while full alignment of interests combined with delegation of authority is feasible, it is never optimal. The optimal contract is "bang-bang"---in one region of the state space, full alignment takes place, in the other, no alignment takes place. We then compare these contracts to those in which the principal has full commitment power as well as to several "informal" institutional arrangements.

[1]  Jstor,et al.  Invention in the Industrial Research Laboratory , 1963, Journal of Political Economy.

[2]  R. Coase The Nature of the Firm , 1937 .

[3]  Bengt Holmstrom,et al.  On The Theory of Delegation , 1980 .

[4]  J. Sobel,et al.  STRATEGIC INFORMATION TRANSMISSION , 1982 .

[5]  D. Sappington Limited liability contracts between principal and agent , 1983 .

[6]  Jean-Jacques Laffont,et al.  A complete solution to a class of principal-agent problems with an application to the control of a self-managed firm , 1984 .

[7]  Knut Sydsæter,et al.  Optimal control theory with economic applications , 1987 .

[8]  Thomas W. Gilligan,et al.  Collective Decisionmaking and Standing Committees: An Informational Rationale for Restrictive Amendment Procedures , 1987 .

[9]  Thomas W. Gilligan,et al.  Asymmetric Information and Legislative Rules with a Heterogeneous , 1989 .

[10]  Nahum D. Melumad,et al.  Communication in settings with no transfers , 1991 .

[11]  Roger B. Myerson,et al.  Game theory - Analysis of Conflict , 1991 .

[12]  Paul R. Milgrom,et al.  Economics, Organization and Management , 1992 .

[13]  Canice Prendergast,et al.  A Theory of "Yes Men." , 1993 .

[14]  J. Tirole,et al.  Formal and Real Authority in Organizations , 1997, Journal of Political Economy.

[15]  Mathias Dewatripont,et al.  Advocates , 1999, Journal of Political Economy.

[16]  Steven Tadelis,et al.  Incentives Versus Transaction Costs: A Theory of Procurement Contracts , 2001 .

[17]  Matthew Rabin,et al.  Incentives for Procrastinators , 1999 .

[18]  Wouter Dessein Authority and Communication in Organizations , 2002 .

[19]  David P. Baron,et al.  Legislative Organization with Informational Committees , 2000 .

[20]  Marco Ottaviani,et al.  The economics of advice , 2000 .

[21]  Roland Strausz,et al.  Contracting with Imperfect Commitment and the Revelation Principle: The Single Agent Case , 2001 .

[22]  V. Krishna,et al.  Asymmetric Information and Legislative Rules: Some Amendments , 2001, American Political Science Review.

[23]  E. Brousseau,et al.  The Economics of Contracts: Bibliography , 2002 .

[24]  Message-contingent delegation , 2006 .

[25]  Saloner,et al.  Strategic Management , 2000, Metals and Energy Finance.