| James A. Dearden, Lehigh University Dorothy Klotz, Fordham University |
| Committee Decisions and Contracting |
| Session: C-10-2 Tuesday 15 August 2000 by Dearden, James A. |
| Institutions often delegate decision-making power to selected members. We examine this issue in a multiple principal-single agent framework. In our paper, a committee of principals approach an agent about the production of a two-dimensional commodity. One dimension of the agent's production is verifiable, while the other is not. Having different preferences as to the importance of the two dimensions, the principals must agree by a majority-rule process on the contract they will offer the agent. After the agent receives the contract, she produces and then the committee considers whether to accept the agent's production. The contract employs two strategic tools to motivate the agent. The first tool is a minimum requirement on the verifiable dimension that motivates the agent to produce in the verifiable dimension. The second tool is a gatekeeper (i.e., one principal who has the power to determine whether the full group considers the agent's production). The gatekeeper motivates the agent to produce in the unverifiable dimension. We demonstrate that these strategic tools work fairly well, but not perfectly. Even with the ability to motivate the agent to produce in the unverifiable dimension, the agent still tends to overproduce in the verifiable dimension and underproduce in the unverifiable dimension. We also establish that the agent earns economic surplus only if she is poor at producing the verifiable characteristic as well as anywhere from moderately good to exceptionally good at producing the unverifiable characteristic. Our paper adds to the budding economics literature on the delegation of decision-making authority. Aghion and Tirole (Journal of Political Economy, 1997) and Tirole (Econometrica, 1999) examine information asymmetries as a reason for strategic delegation. In a related issue, Perry and Samuelson (Rand Journal of Economics, 1994) and Segendorff (Games and Economic Behavior, 1998) examine the strategic delegation to a tough bargaining representative. |