Optimal Delegated Contracting

60 Pages Posted: 28 Jun 2019

See all articles by Andrea M. Buffa

Andrea M. Buffa

Boston University - Department of Finance & Economics

Qing Liu

Boston University - Department of Finance & Economics

Lucy White

Centre for Economic Policy Research (CEPR); Boston University - Department of Finance & Economics

Date Written: June 2019

Abstract

We investigate a setting where two agents exert complementary efforts on a principal’s project. In standard Principal-Agent theory, contracts are public and it is at least weakly better for a principal to contract directly with each agent. Yet in the real world, delegated contracting is very common. We show delegated contracting can be optimal when that the terms of incentive contracts are observed only by the direct signatories to those contracts. With centralized contracting, each agent fears that the principal will opportunistically reduce the other agents bonus, muting incentives to exert effort. With delegated contracting, one agent observes the contract of the agent he hires, alleviating effort concerns, but allowing rent extraction. In delegating, the principal trades off the loss of control and rent extraction by the hiring agent against the gains from improved observability and effort.

Keywords: delegation, private contracts, moral hazard, subcontracting, complementarities

JEL Classification: D86, G34, G23, G24

Suggested Citation

Buffa, Andrea M. and Liu, Qing and White, Lucy, Optimal Delegated Contracting (June 2019). Available at SSRN: https://ssrn.com/abstract=3410479 or http://dx.doi.org/10.2139/ssrn.3410479

Andrea M. Buffa (Contact Author)

Boston University - Department of Finance & Economics ( email )

Questrom School of Business
595 Commonwealth Avenue
Boston, MA 02215
United States

HOME PAGE: http://sites.google.com/site/andreabuffa/

Qing Liu

Boston University - Department of Finance & Economics ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States

Lucy White

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Boston University - Department of Finance & Economics ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States

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