Conferences at Department of Economics, University of Toronto, Canadian Economic Theory Conference 2019

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Credibility, efficiency and the structure of authority

Sinem Hidir*, Dimitri Migrow

Date: 2019-05-03 3:15 pm – 3:45 pm
Last modified: 2019-04-14

Abstract


We study the optimal allocation of authority in a setup with endogeneous information and different information acquisition abilities. In our principal-agent setting with two-sided information acquisition and no transfers, the players only disagree when uninformed.We show that a sufficiently effcient principal does not lose any authority when delegating to a less effcient agent plus gains from the additional information the agent may have. As information acquisition eorts are substitutes, a relatively more efficient principal finds iteasier to persuade an agent and provides a recommendation that the agent follows when uninformed. A less efficient principal centralizes fearing that the agent will not follow his advice and follows the agent's recommendation if unable to obtain information herself.

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