Delegation in Long-Term Relationships

36 Pages Posted: 20 Feb 2012 Last revised: 25 Apr 2012

See all articles by Miriam Schuette

Miriam Schuette

Ludwig Maximilian University of Munich (LMU) - Munich Graduate School of Economics (MGSE)

Philipp C. Wichardt

University of Rostock - Department of Economics

Date Written: April 24, 2012

Abstract

This paper considers the eff ects of a two-period interaction on the decision of a principal to delegate authority to a potentially biased but better informed agent. Compared to the (repeated) one-period case, the agent's first period actions may also signal his type which in turn impacts wages in Period 2. As a result, biased agents have an incentive not to follow their own preferences in Period 1, thereby inducing the principal to delegate more often. Moreover, we find that, depending on the players' relative utilities and the wage schedule, long term relationships will increase aggregate welfare. Finally, to empirically support our findings, we analyse data from the German Socio-Economic Panel (SOEP) which show that temporary workers indeed experience less autonomy in their decisions.

Keywords: Delegation, Signalling, Reputation

JEL Classification: C72, C73, D82, D86, L22, M54

Suggested Citation

Schuette, Miriam and Wichardt, Philipp C., Delegation in Long-Term Relationships (April 24, 2012). Available at SSRN: https://ssrn.com/abstract=2008304 or http://dx.doi.org/10.2139/ssrn.2008304

Miriam Schuette

Ludwig Maximilian University of Munich (LMU) - Munich Graduate School of Economics (MGSE) ( email )

Kaulbachstrasse 45
München, 80539
Germany

Philipp C. Wichardt (Contact Author)

University of Rostock - Department of Economics ( email )

Ulmenstr. 69
Rostock, 18057
Germany

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