Credibility, Efficiency and the Structure of Authority

Abstract

In many economic settings it is optimal to endow individuals with high abilities, ratherthan those with low abilities, with decision-making power. Yet there is rich empirical evidence showing that many of those in charge of decisions are not necessarily the most talented. We offer a novel rationale for why choosing a decision maker with low ability might be welfareoptimal. In a setting with two-sided information acquisition where the players disagree only when uninformed, we show that a high-ability principal optimally delegates authority to a low-ability agent because the latter not only exerts higher effort than under centralized decision-making, but also follows the principal’s advice when uninformed himself. (joint with Dimitri Migrow)