Optimal Delegation, Review of Economic Studies
We analyze the optimal delegation of authority by an uninformed principal to an informed but biased agent. When the principal cannot use message-contingent transfers, she offers the agent a set of decisions from which he can choose his preferred one. We fully characterize the optimal delegation set for general distributions of the state space and preferences with arbitrary continuous state dependent biases. We also provide necessary and sufficient conditions for commonly observed organizational arrangements to be optimal. Finally, we investigate how changes in the economic environment affect the agent's discretion.
Ricardo Alonso, Niko Matouschek
Alonso, Ricardo, and Niko Matouschek. 2008. Optimal Delegation. Review of Economic Studies. 75(1): 259-293.