Delegation with a Reciprocal Agent [WP]

Abstract

We consider a model in which a principal may delegate the choice of a project to a better informed agent. The preferences of the agent and the principal about which project should be undertaken can be discordant. Moreover, the agent benefits from being granted more discretion in the project choice and may be motivated by reciprocity. We find that the impact of the agent's reciprocity on the discretion he receives crucially depends on the conflict of interest with the principal. If preferences are very discordant, the principal is more likely to retain authority about the choice of the project when the agent is more reciprocal. Hence, reciprocity exacerbates a severe conflict of interest. In contrast, if preferences are more congruent, discretion is broader when the agent is more reciprocal. Hence, reciprocity mitigates a mild conflict of interest. In addition, we find that the possibility of being able to offer monetary payments to the agent can make the principal worse off when the agent reciprocates. We also empirically test the predictions of our model using the German Socio-Economic Panel finding some support for our theoretical results.