We analyze the delegation policy when the principal has reputational concerns. Both the principal and the agent can be either good or biased; the good players prefer the correct decision, while the biased ones prefer a high action even though it may be wrong. An evaluator who forms the principal's reputation may or may not be able to observe who makes the decision. When the evaluator cannot observe the allocation of authority, the principal shares the credit and blame with the agent. Although delegation can improve the quality of decision making because the agent has better information, it may also hurt the good principal's reputation because the high action may be taken by the biased agent while the blame will be shared when it is wrong. Thus, the good principal has a tendency to keep too much authority to maintain her reputation. By contrast, when the evaluator can observe the allocation of authority, delegation becomes a signaling device for the good type of principal to differentiate herself from the biased one. This results in an excessive allocation of authority toward the agent.
ASJC Scopus subject areas
- Sociology and Political Science
- Economics and Econometrics