The Optimality of (Stochastic) Veto Delegation

We analyze the optimal delegation problem between a principal and an agent, assuming that the latter has state-independent preferences. Among all incentive- compatible direct mechanisms, veto mechanisms—in which the principal commits to mixing between the status quo option and another state-dependent option—yield the highest expected payoffs for the principal. In the optimal veto mechanism, the principal uses veto (i.e., choosing the status quo option) only when the state is above some threshold, and both the veto probability and the state-dependent option increase as the state becomes more extreme. Our model captures the aspect of many real-world scenarios in which the agent only cares about the principal’s final decision, and the result provides a rationale for the widespread use of veto delegation in various organizations