Delegation and Information Revelation

Abstract

This paper addresses the question of delegation in a principal-agent setting with asymmetric information. If the person who has the power to act, the principal, doesn't have the necessary information to make the best possible decision, she can address herself to someone, the agent, who has this information. Such delegation of authority has its drawbacks given that the agent may not implement the principal's ideal decision. Delegation is costly for the principal. This cost is called the loss of control. But delegation has also its benefits. We show that delegation is useful to reduce the initial asymmetry of information between the principal and the agent. The benefits of delegation are linked to the information transmitted by the agent to the principal. To show this, we model an organization composed of one principal and one agent. The organization should take a sequence of decisions that are affected by a common environemental parameter. We assume that there is an initial asymmetry of information between the principal and the subordinate agent: the agent knows the state of the world while the principal has only some prior about its distribution. Moreover, we assume that the principal cannot use revelation techniques la Baron Myerson to elicit agent's superior information. In contrast, we adopt an incomplete contract framework and posit that the decision and the state of the world parameter cannot be contracted for. Therefore, the remaining contracting variable is the allocation of decision rights. With these simple contracts, we study how the agent's decision can signal his information to the principal. When the agent is in charge of a decision, his decision signals his information to the principal. The trade off between information transmitted through decisions under delegation and the associated loss of control is the heart of our analysis.