Optimal Limited Authority for Principal
Wei Li*, Hao Li, Anton Kolotilin
Date: 2012-05-05 3:45 pm – 4:15 pm
Last modified: 2012-04-20
Abstract
This paper studies a principal-agent problem where the only commitment for the uninformed principal is to restrict the set of decisions she makes following a report by the informed agent. Compared to no commitment, the principal improves the quality of communication from the agent. An ex ante optimal equilibrium for the principal corresponds to a finite partition of the state space, and each retained decision is suboptimal for the principal, biased toward the agent's preference. Generally an optimal equilibrium does not maximize the number of decisions the principal can credibly retain.