Skip to main content
Other
Contracting for Information under Imperfect Commitment
(2004)
  • Vijay Krishna, Penn State University
  • John Morgan, University of California, Berkeley
Abstract

Organizational theory suggests that authority should lie in the hands of those with information, yet the power to transfer authority is rarely absolute in practice. We investigate the validity and application of this advice in a model of optimal contracting between an uninformed principal and informed agent where the principal's commitment power is imperfect. We show that while full alignment of interests combined with delegation of authority is feasible, it is never optimal. The optimal contract is "bang-bang"---in one region of the state space, full alignment takes place, in the other, no alignment takes place. We then compare these contracts to those in which the principal has full commitment power as well as to several "informal" institutional arrangements.

Keywords
  • Imperfect commitment,
  • optimal contracting,
  • delegation
Publication Date
November, 2004
Citation Information
Vijay Krishna and John Morgan. "Contracting for Information under Imperfect Commitment" (2004)
Available at: http://works.bepress.com/john_morgan/5/