Optimal Delegation

How should a principal delegate a task to an agent? This paper studies the principal's choice of an agent's freedom of action as an incentive problem. The optimal contract simultaneously copes with two problems of asymmetric information: the agent must be motivated to acquire productive information and he must be given incentives to use the information in the principal's interest. In order to provide the agent with proper incentives for information acquisition the principal may optimally choose to curtail the agent's authority over decision making even if there are no conflicts with respect to the decision itself. As a result the relationship between the severity of the conflict of principal's and agent's interests and the agent's optimal freedom of action is non-monotonic. Our theory provides a rationale for commonly observed phenomena such as 'demanding clear statements' from advisors or 'imposing an innovation bias' on an organizational structure.