Strategic Delegation by Unobservable Incentive Contracts

Columbia U, Economics Discussion Paper No. 0102-26

33 Pages Posted: 29 Apr 2002

See all articles by Levent Kockesen

Levent Kockesen

Koc University - Department of Economics

Efe A. Ok

Leonard N. Stern School of Business - Department of Economics

Date Written: January 2002

Abstract

Many strategic interactions in the real world take place among delegates empowered to act on behalf of others. Although there may be a multitude of reasons why delegation arises in reality, one intriguing possibility is that it yields a strategic advantage to the delegating party. In the case where only one party has the option to delegate, we analyze the possibility that strategic delegation arises as an equilibrium outcome under completely unobservable incentive contracts within the class of two-person extensive form games. We show that delegation may arise solely due to strategic reasons in quite general economic environments even under unobservable contracts. Furthermore, under some reasonable restrictions on out-of-equilibrium beliefs and actions of the outside party, strategic delegation is shown to be the only equilibrium outcome.

Keywords: Strategic Delegation, Unobservable Contracts, Forward Induction

JEL Classification: C72, D80

Suggested Citation

Kockesen, Levent and Ok, Efe A., Strategic Delegation by Unobservable Incentive Contracts (January 2002). Columbia U, Economics Discussion Paper No. 0102-26, Available at SSRN: https://ssrn.com/abstract=308766 or http://dx.doi.org/10.2139/ssrn.308766

Levent Kockesen (Contact Author)

Koc University - Department of Economics ( email )

Rumeli Feneri Yolu
Sariyer 80910, Istanbul
Turkey

Efe A. Ok

Leonard N. Stern School of Business - Department of Economics ( email )

269 Mercer Street
New York, NY 10003
United States
212-998-8920 (Phone)
212-995-4186 (Fax)

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