Delegated Contracting

We consider a single-principal/multi-agent model to investigate the principal's preferences over delegated contracting. The analysis extends the single-agent/multi-task LEN model in Feltham and Xie (1994) to a multi-agent/multi-task context. We consider full-commitment contracts, i.e., the principal is assured that his contract for each agent is implemented, and analyze the principal's delegation choice to authorize a senior agent to contract with a junior agent based on reports that are only available to the agents. Despite the full-commitment assumption, the agents' incentives to write a decentralized contract are driven by their incentives to share risk, and by their incentives to re-allocate their effort choices, i.e., the two frictions that arise in a limited-commitment setting (Feltham and Hofmann, 2007a). We find that there are benefits and costs to delegated contracting, i.e., establishing a decentralized performance evaluation in addition to a centralized performance evaluation may be detrimental to the principal. However, a decentralized performance evaluation is likely to be beneficial if the senior agent is evaluated based on an aggregate report