Conferences at Department of Economics, University of Toronto, Canadian Economic Theory Conference 2012

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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.

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