Strategic Delegation Research Articles

Strategic Delegation to Organizations*

In this paper, we show that a principal can increase her payoffs by delegating decisions to an organization of agents—a group of rational individuals who interact according to specified rules—even when the agents’ preferences are identical to those of the principal. The mechanism driving this result rests on the limited impact of individual choices on the firm’s policy, when multiple agents interact in shaping it. In competitive environments, delegating decisions to organizations of agents augments the set of equilibrium outcomes, allowing for Pareto improvements. Hence, our results provide a novel rationale for decentralized decision‐making in firms.

Strategic delegation in an international mixed oligopoly

We derive equilibrium delegation contracts in an international mixed duopoly with a private firm in one country and a public firm in another. We compare contracts weighting sales to those weighting relative sales. The endogenous equilibrium emerges with relative contracts chosen for both firms when the public firm's country market share is small. We compare this model to an otherwise similar domestic market with a foreign firm and to a single market without international borders. We confirm the use of delegation in all models but only the international market has both firms adopting relative sales contracts.

Strategic delegation in the formation of modest international environmental agreements

We reassess the well-known “narrow-but-deep” versus “broad-but-shallow” trade-off in international environmental agreements (IEAs), taking into account the principal–agent relationship induced by the hierarchical structure of international policy. To this end, we expand the modest coalition formation game, in which countries first decide on whether to join an agreement and then decide on emissions by a strategic delegation stage. In the weak delegation game, principals first decide whether to join an IEA, then delegate the domestic emission choices to an agent. Finally, agents in all countries decide on emissions. In countries not joining the IEA, agents choose emissions to maximize their own payoff, while agents of countries joining the IEA set emissions to internalize some exogenously given fraction γ of the externalities that own emissions cause on all members of the IEA. In the strong delegation game, principals first delegate to agents, who then decide on membership and emissions. We find that strategic delegation crowds out all efforts to increase coalition sizes by less ambitious agreements in the weak delegation game, while in the strong delegation game the first-best from the principals’ point of view can be achieved.

Strategic delegation and network externalities under export rivalry market

AbstractIn the presence of network externalities, this study examines the endogenous delegation structure in an export rivalry market with import tariff under Bertrand competition. Contrast to previous works, we show that (i) with strong (weak) network externalities, choosing delegation for exporters is a dominant strategy, which implies the managerial delegation for output expansion (restriction) is socially desirable; (ii) with intermediate network externalities, the exporters choose no delegation in equilibrium; (iii) compared to no delegation, a smaller import tariff further increases both exporters incentives, consumer surplus and social welfare to choose delegation for output expansion unless the strength of network externalities is small; and (iv) hence, two contrasting prisoner’s dilemmas occur in the Bertrand competition when the network effect is medium‐sized.

Mergers by family firms and managerial delegation: a Cournot model and empirical evidence from Spain

PurposeThe purpose of this paper is to analyse a key research hypothesis: Do firms ruled by managers have a greater rationale to implement a mergers and acquisitions (M&A) than (family) firms managed by their owners?Design/methodology/approachThis paper uses an organizational-delegation-quantity oligopoly game to examine the profitability of M&As for firms that strategically delegate production decisions to managers versus family firms with no strategic delegation. This paper delimits the condition for delegation as aimed at increasing merger profitability: non-family CEOs will implement mergers more frequently than family CEOs and more so for inefficient firms because these require fewer synergies. The paper tests the main propositions with data on all M&As by small and medium firms in Spain in 2017 and 2018.FindingsThe greater the average operating margin of a firm, the more likely a merger, which is also more likely between non-family firms. The evidence of higher ex post synergies by firms is not statistically significant due to large variability, suggesting that some family firms did not obtain the expected ex ante synergies. The lesson is that family firms competing in an environment of high marginal costs (e.g. industries in the early stage of the life cycle) seeking to grow through inorganic means such as M&As have an incentive to professionalize management.Research limitations/implicationsThis paper models competition in a Cournot fashion, representative of industries where firms compete in terms of sales growth and increased market share. Other results might hold in industries where firms are oriented to price competition or to service differentiation. The empirical research uses proxies for key variables such as the form of firm governance and unit costs, while hypotheses on ex ante synergies driving merger decisions had to be tested through ex post synergies.Originality/valueM&As by small firms and family firms remain largely unexplored in the literature. This paper contributes with both a theoretical model and empirical research that highlight the implications of strategic delegation contracts for M&A deals.

Strategic delegation in a differentiated duopoly with asymmetric costs

This paper examines the impact of product differentiation on strategic delegation in a Cournot duopoly with asymmetric costs. We show that compared with the no-delegation case, when both firms delegate, although the cost-inefficient firm always gets worse, the efficient firm gets better when the degree of product differentiation is sufficiently low and/or the cost asymmetry is sufficiently large. Moreover, as products become closer substitutes, the efficient firm always makes its manager more aggressive, however, the inefficient firm may make its manager less aggressive.

Compensation disclosures and strategic commitment: Evidence from revenue-based pay

A 2006 rule change in the United States mandated that publicly traded firms provide more detailed disclosures about executives’ compensation plans. In response to the new disclosure requirements, Cournot firms with large market shares add revenue-based pay to their CEOs’ pay packages. This change in pay practices coincides with a shift towards more aggressive product market equilibria, characterized by greater production expenditures and lower margins. Jointly, these patterns are consistent with predictions from the theory of “strategic delegation,” and suggest that the new disclosure requirements enhanced the viability of committing through executive incentives. After adopting the new disclosure requirements, many firms appear to restructure their executives’ pay packages as strategic devices designed to make rivals curtail their competitive actions.

Efficiency of bilateral delegation in a mixed Cournot duopoly

AbstractWe consider a bilateral delegation mixed duopoly with quantity setting, where the objective function of the public managers is based on strategic manipulation of a Generalized Welfare Function. We show that such manipulation, coupled with strategic delegation by the private firm, enables the government to enforce an efficient outcome at equilibrium. When the manipulation/delegation choices and their sequence are endogenized, public manipulation and private delegation are supported at equilibrium, with the government, as first mover, setting the weights of the Generalized Welfare Function at the most efficient level consistent with private firm retaining a manager. This ensures maximum welfare, as compared with all other organizational structures.

Sharing managerial contract information in a vertically related market

Recent research shows that in duopolies with strategic delegation, firm owners have an incentive to always share information about managerial compensation contracts. We study how sharing of contract information is affected by the presence of a supplier. We find that under quantity competition, a partial information‐sharing equilibrium may occur. Firms that share contract information punish their managers for sales to soften supplier pricing. Mandating information sharing increases total welfare but decreases consumer surplus. Under price competition, firms always want to share managerial contract information. Finally, firm profits can be higher under price competition than under quantity competition.

Biased managers in vertically related markets

This paper analyses the choice of managers' types in a vertical structure with a common input supplier. Depending on the degree of product differentiation, the choice of either an overconfident or an underconfident manager can arise whatever the downstream competition mode. In addition, when competition is in quantities, the well‐known prisoner's dilemma result of strategic delegation does not apply when owners optimally delegate to underconfident managers. Instead, under price competition, a prisoner's dilemma applies but only when the strategic decision is optimally delegated to overconfident managers. Relative to the endogenous market structure, a novel outcome with multiple asymmetric equilibria arises when the degree of product differentiation is low. Introducing multiple upstream suppliers confirms the importance of taking the structure of upstream markets into account in assessing the strategic choices by downstream firms.

Generalization of strategic delegation

This study revisits the strategic delegation game in a duopoly setting by generalizing the managerial incentives. Prior studies considered only the case when firms’ managers are incentivized by a linear combination of profits and a specific objective such as revenue or market share. By extending managerial incentives to a linear combination of profits and a quadratic function of firm outputs, we aim to determine the type of managerial incentives that can achieve the highest profit. We show the following results. First, in any managerial incentive structure, the equilibrium profit is equal to or greater than that in the revenue-oriented case. Second, when the coefficient of the squared term is equal to the coefficient of the product of both firms’ outputs, the equilibrium profit is equal to that in the revenue-oriented case. Third, the firm achieves the highest profit with a managerial incentive consisting of a linear combination of profits and functions that increase with the product of both firms’ outputs and decrease with its output but that do not depend on the squared term of its output. Fourth, the equilibrium profit is strictly less than that in the no delegation case.

Strategic delegation under rational and fulfilled expectations in quantity competition

ABSTRACT In an asymmetric duopoly with quantity competition such that consumers form expectations about network sizes before and after the owners of both firms choose their incentive parameters (fulfilled and rational expectations, respectively), this paper reconsidered the level of their incentive parameters adopting the approach emplyed in two important existing works in this field. In quantity competition, we demonstrate that in such an asymmetric duopoly, the owners of both firms make their managers more aggressive than their sole profit maximizers, regardless of the strength of network effects.

Delegation in Multiproduct Downstream Firms with Heterogeneous Channels

Incorporating the extension of exclusive dealing into Cournot competition, we analyze the multiproduct downstream firms' choice of organizational form between U-form and M-form. With managerial delegation in downstream firms, we find that choosing U-form for the downstream firms is a dominant strategy under partial exclusive dealing, while M-form is a dominant strategy under exclusive dealing. If the degree of interbrand competition is sufficiently large when comparing U-form and M-form in equilibrium, social welfare and consumer surplus with U-form under partial exclusive dealing are greater than those with M-form under exclusive dealing, and vice versa. Furthermore, when decentralized bargaining is allowed, we find that (i) the strategic delegation is redundant and (ii) regardless of channel structure, one downstream firm chooses M-form and the other downstream firm chooses U-form except for small intermediate range of substitutability.enter

Interregional negotiations and strategic delegation under government subsidy schemes

AbstractWe examine the strategic delegation problem in the context of interregional negotiations under the subsidy policies of a central government. It is well known that when such negotiations are delegated to representatives, each region in a country elects its representative strategically, resulting in inefficient negotiation outcomes. This study focuses on a common subsidy policy called a cost‐matching grant to examine whether an optimal grant exists that restores the efficiency of negotiation outcomes. Our results show that the central government obtains this optimal grant if the manipulability of the negotiation breakdown outcome is sufficiently weak. The strength of the manipulability is important because introducing a grant generates a new kind of manipulation of negotiation breakdown outcomes. However, when a new representative is elected after a negotiation breaks down, the new manipulability is negated. Hence, the central government always obtains the optimal cost‐matching grant.

Investment Choice with Managerial Incentive Schemes

In this paper, we show that firms might get an additional strategic benefit from using marginal-cost-reducing investments in conjunction with strategic delegation. While both these instruments allow firms to “aggressively” participate in product market competition, we show that they act as substitutes or complements depending on whether they are chosen simultaneously or sequentially. Given that the use of such instruments is inseparably linked with a Prisoner’s Dilemma kind of situation, our analysis shows a way to mitigate at least to some extent such effects, through their simultaneous use. We find that the unique Nash equilibrium of the game with commitment comprises both players choosing the instruments simultaneously. In case the instruments are chosen without commitment, an asymmetric equilibrium is shown to exist in addition to the simultaneous protocol, yielding unequal payoffs.

A New Rationale for Not Picking Low-Hanging Fruits: the Separation of Ownership and Control

Recent attempts at explaining the energy-efficiency gap rely on considerations related to organizational and behavioral/cognitive failures. In this paper, we build on the strategic delegation literature to advance a complementary explanation. We show that strategic market interaction may encourage business owners to instill a bias against energy efficiency in managerial compensation contracts. Since managers respond to financial incentives, their decisions will reflect this bias, resulting in a lack of investment.

A Note on Strategic Delegation and Network Externalities Under Export Rivalry Market

In the presence of network externalities, this study examines the endogenous delegation structure in an export rivalry market with import tariff under Bertrand competition. Contrast to previous works, we show that (i) with strong (weak) network externalities, choosing delegation for exporters is a dominant strategy, which implies the managerial delegation for output {\it expansion (restriction)} is socially desirable; (ii) with intermediate network externalities, the exporters choose no delegation in equilibrium; (iii) compared to no delegation, a smaller import tariff further increases both exporters incentives to choose delegation for output expansion unless the strength of network externalities is small.

Incentive pay and rent in oligopoly

Our purpose is to examine strategic delegation in nonlinear Cournot oligopoly. The findings generalize earlier results and show that managerial contracts reward sales under the condition of a fixed input price. Alternatively, under a variable input price, owners might punish sales even when goods are strategic substitutes. We conclude that optimal strategic motivation depends critically on the input price. For example, motivation that supports positive owner profit under a fixed input price nullifies owner‐profit if an upstream monopolist with convex costs sets the input price. In a vertical relationship between a duopoly and an upstream monopolist, strategic delegation punishes sales.

Firms’ strategic delegation with heterogeneous consumers

We revisit firms’ strategic delegation in a Cournot game. We consider a market comprising two consumer groups, with either a high or low willingness to pay. In this market, we first consider firms’ identical marginal costs and show that either/both firms’ owners may strategically abandon the delegation option to avoid price collapse. We find three types of delegation decisions with either/both/no firm delegating in equilibrium. We further consider firms’ asymmetric marginal costs and show that the asymmetric equilibrium wherein only the less efficient firm delegates will exist in a wider parameter range, compared to that wherein only the more efficient firm delegates. Moreover, delegation may enable the less efficient firm to achieve a higher profit than her rival.

Strategic delegation in successive oligopolies with differentiated firms

A robust result in the literature on strategic incentives is that under quantity competition firm owners induce their managers to make more aggressive quantity choices in the product market than under profit maximization. We use a standard framework of successive oligopolies with differentiated products to show that depending on the degree of product substitution, the number of upstream suppliers, and the number of downstream rivals, owners might prefer to punish their manager for additional sales, i.e. to induce them to act soft instead of tough in the product market. We also consider price competition and find that firm and supplier profits can be higher if managers choose prices rather than quantities. Consumer surplus and total welfare are always higher under price competition.