Dynamic delegation with a persistent state

Author:

Chen Yi1

Affiliation:

1. Johnson College of Busines, Cornell University

Abstract

In this paper, I study the dynamic delegation problem in a principal–agent model wherein an agent privately observes a persistently evolving state, and the principal commits to actions based on the agent's reported state. There are no transfers. While the agent has state‐independent preferences, the principal wants to match a state‐dependent target. I solve the optimal delegation in closed form, which sometimes prescribes actions that move in the opposite direction of the target. I provide a simple necessary and sufficient condition for that to occur. Generically, the principal fares strictly better in the optimal delegation than in the babbling outcome. Over time, the principal is worse off in expectation, but the agent is better or worse off depending on the shape of the principal's state‐dependent target.

Funder

Pennsylvania State University

Cornell University

Johns Hopkins University

University of Southern California

University of Arizona

Western University

Peking University

HSBC Bank USA

Business School, Hebrew University of Jerusalem

Southern University of Science and Technology

Southern Economic Association

Publisher

The Econometric Society

Subject

General Economics, Econometrics and Finance

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