Repeated Delegation

53 Pages Posted: 22 Jan 2015 Last revised: 28 Oct 2016

Elliot Lipnowski

University of Chicago - Department of Economics

Joao Ramos

Marshall School of Business - University of Southern California

Date Written: September 20, 2016

Abstract

We study an ongoing relationship of delegated decision making. Facing a stream of projects to potentially finance, a principal must rely on an agent to assess the returns of different opportunities; the agent has lower standards, wishing to adopt every project. In equilibrium, the principal allows bad projects in the future to reward fiscal restraint by the agent today, but she cannot commit to reward the agent indefinitely. We fully characterize the equilibrium payoff set (at fixed discounting), showing that Pareto optimal equilibria can be implemented via a two-regime ‘Dynamic Capital Budget’. We show that, rather than backloaded rewards — a prevalent feature of dynamic agency models with greater commitment power — our Pareto optimal equilibria feature an inevitable loss of autonomy for the agent as time progresses. This drift toward conservatism speaks to the life cycle of an organization: as it matures, it grows less flexible but more efficient.

Keywords: Delegation, limited commitment, repeated game, capital budgeting

JEL Classification: C73, D23, D82, D86, G31

Suggested Citation

Lipnowski, Elliot and Ramos, Joao, Repeated Delegation (September 20, 2016). Available at SSRN: https://ssrn.com/abstract=2552926 or http://dx.doi.org/10.2139/ssrn.2552926

Elliot Lipnowski

University of Chicago - Department of Economics ( email )

1126 E. 59th St
Chicago, IL 60637
United States

Joao A Ramos (Contact Author)

Marshall School of Business - University of Southern California ( email )

701 Exposition Boulevard, STE 205
Los Angeles, CA 90089-1422
United States

HOME PAGE: http://www.joaoaramos.com/

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