56 Pages Posted: 22 Jan 2015 Last revised: 24 Mar 2020
Date Written: February 28, 2020
In an ongoing relationship of delegated decision making, a principal consults a biased agent to assess projects' returns. In equilibrium, the principal allows future bad projects to reward fiscal restraint, but cannot commit to indefinite rewards. We characterize equilibrium payoffs (at fixed discounting), showing that Pareto optimal equilibria are implemented via a two-regime 'Dynamic Capital Budget'. Rather than facing backloaded rewards—as in dynamic agency models with commitment power—the agent loses autonomy as time progresses.
Keywords: delegation, limited commitment, repeated game, capital budgeting
JEL Classification: C73, D23, D82, D86, G31
Suggested Citation: Suggested Citation