Dino Gerardi (Collegio Carlo Alberto) (webinar)

“Delegation with endogenous states”

Abstract: We present a model of delegation with moral hazard. A principal selects a set of possible actions that an agent can choose from. Before choosing an action, the agent can exert costly effort that affects the distribution of an uncertain state of the world. We show that when the agent and the principal have the same preference over actions given the state, the optimal delegation set has a simple form. The principal selects an interval where low enough actions are not allowed to incentivize high effort. We also analyze the model with a biased agent with quadratic utility and a uniform distribution of states. We show that the optimal delegation set is also convex. Low actions are excluded whenever the optimal mechanism entails positive effort. Several comparative statics are performed.

Joint with Lucas Maestri and Ignacio Monzon.