Agency Problems and Commitment in Delegation Games

University Of California-Los Angeles, Los Angeles CA

Investigators

Abstract

In many economic situations delegates are hired to play games on behalf of their principals. The principal-agent literature has had much success in analyzing how optimal contracts should respond to various types of agency problems (adverse selection, moral hazard, and combinations of both) in the delegation relationship. However, the agent in most of this literature does not play a game with other parties, rather, his actions alone determine the principal's payoff subject to perhaps exogenous randomization by nature. The proposed research is a study of how principals should design the delegation contract in order to provide proper incentives for their delegates AND gain strategic advantage against the other parties in several classes of delegation games. The findings will likely provide important ramifications to both the principal-agent literature and the delegation literature. The research may also throw light on interesting features of real life contracts such as holdbacks in car dealer contracts, and allow derivation of certain implications that could lead to empirical tests of the commitment effect. The proposed research, largely joint work with Ph.D. student Walter Cont, is to study a delegate bargaining game in which the seller of an indivisible good hires a delegate (an intermediary) to sell the good to a buyer. We show that the seller's strategic manipulation of the delegation contract may cause bargaining failures between the delegate and the buyer when the seller sets a minimum price exceeding some buyers' valuations. Furthermore, the interaction between commitment (through minimum price) and incentives depends on the nature of the agency problem. We would like to extend the basic model in several interesting directions and apply the model to car dealership contracts.