Efficient Delegation by an Informed Principal

Abstract

Automobile dealership contracts, the management practice of category management, and transfer pricing practices by multinationals can exhibit a property we refer to as partial delegation. In a bargaining problem between an informed party and an uninformed party, partial delegation involves the informed party delegating control of bargaining responsibilities to an agent while retaining control of its private information. We show that partial delegation, with or without an observable agency contract, enables the informed party to earn information rents without creating quantity distortions. That is, first-best quantities are traded in equilibrium. In general, we argue that partial delegation allows an informed principal to promote more efficient agreements with outside parties while also endogenously improving its bargaining power.

Keywords: Delegation, efficient bargaining, contracting

JEL Classification: C78, D82, L24