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Delegated Contracting

43 Pages Posted: 25 Jul 2007  

Gerald A. Feltham

University of British Columbia

Christian Hofmann

Ludwig Maximilian University of Munich - Faculty of Business Administration (Munich School of Management)

Date Written: July 25, 2007

Abstract

We consider a single-principal/multi-agent model to investigate the principal's preferences over delegated contracting. The analysis extends the single-agent/multi-task LEN model in Feltham and Xie (1994) to a multi-agent/multi-task context. We consider full-commitment contracts, i.e., the principal is assured that his contract for each agent is implemented, and analyze the principal's delegation choice to authorize a senior agent to contract with a junior agent based on reports that are only available to the agents. Despite the full-commitment assumption, the agents' incentives to write a decentralized contract are driven by their incentives to share risk, and by their incentives to re-allocate their effort choices, i.e., the two frictions that arise in a limited-commitment setting (Feltham and Hofmann, 2007a). We find that there are benefits and costs to delegated contracting, i.e., establishing a decentralized performance evaluation in addition to a centralized performance evaluation may be detrimental to the principal. However, a decentralized performance evaluation is likely to be beneficial if the senior agent is evaluated based on an aggregate report.

Keywords: Delegation, Incentives, Multi-agent contracting, Performance evaluation

JEL Classification: M40, M41, M46, M52, D82, C70

Suggested Citation

Feltham, Gerald A. and Hofmann, Christian, Delegated Contracting (July 25, 2007). AAA 2008 MAS Meeting Paper. Available at SSRN: https://ssrn.com/abstract=1002941 or http://dx.doi.org/10.2139/ssrn.1002941

Gerald A. Feltham

University of British Columbia ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada
604-822-8397 (Phone)
604-822-9470 (Fax)

Christian Hofmann (Contact Author)

Ludwig Maximilian University of Munich - Faculty of Business Administration (Munich School of Management) ( email )

Kaulbachstr. 45
Munich, 80539
Germany

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