Credibility, Efficiency and the Structure of Authority

Abstract: We study the optimal allocation of authority in a setup with endogeneous information and differing information acquisition abilities. In our principal-agent setting with two- sided information acquisition and no transfers, the players only disagree when uninformed. We show that a sufficiently efficient principal does not lose any authority when delegating to a less efficient agent plus gains from the additional information the agent may have. As information acquisition efforts are substitutes, a relatively more effcient principal finds it easier to influence the agent and provides a recommendation that the agent follows when uninformed. A less efficient principal centralizes fearing that the agent will not follow her advice and follows the agent's recommendation if unable to obtain information herself.