Disagreement and informal delegation in organizations

Abstract

To investigate delegation decisions within organizations, we develop a principal-agent model in which the principal can only informally delegate authority to the agent and the parties openly disagree with each other in the sense of differing prior beliefs about the optimal course of action. Our analysis shows that the degree of disagreement determines what kind of delegation policy the principal can commit to and this, in turn, alters the agent's effort for information acquisition. Notably, at moderate degrees of disagreement, conditional delegation may arise in equilibrium, whereby the principal credibly commits to allowing the agent to exercise his authority only if he generates additional information about the optimal action. Further, we discuss two extensions in which the principal undertakes an investment that reduces the agent's cost of acquiring information, and the agent discloses his private information strategically. (C) 2020 Elsevier B.V. All rights reserved.