Optimal Delegation with Limited Commitment

hao li, university of toronto
wei li, university of california, riverside

Abstract

In this paper we introduce the model of delegation mechanisms under limited commitment. A privately informed agent is delegated by a principal to choose from a pre-specified set of actions, with the principal committed to not changing the agent's action to any action outside the set but free to switch to some action within the set. For the uniform-quadratic example first introduced by Crawford and Sobel (1982), we characterize the optimal delegation mechanism under limited commitment. In an optimal mechanism, the principal specifies fewer actions in the delegation set in order to relax the incentive compatibility constraints due to limited commitment.