Delegation in Long-Term Relationships

38 Pages Posted: 7 Sep 2012 Last revised: 11 Jul 2014

See all articles by Miriam Schütte

Miriam Schütte

University of Bonn

Philipp C. Wichardt

University of Rostock - Department of Economics

Date Written: April 24, 2012

Abstract

This paper considers the effects 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

Schütte, Miriam and Wichardt, Philipp C., Delegation in Long-Term Relationships (April 24, 2012). SOEPpaper No. 480-2012. Available at SSRN: https://ssrn.com/abstract=2142523 or http://dx.doi.org/10.2139/ssrn.2142523

Miriam Schütte (Contact Author)

University of Bonn ( email )

Regina-Pacis-Weg 3
Postfach 2220
Bonn, D-53012
Germany

Philipp C. Wichardt

University of Rostock - Department of Economics ( email )

Ulmenstr. 69
Rostock, 18057
Germany

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