Delegation with a Reciprocal Agent

Abstract

We consider a model in which a principal may delegate the choice of a project to a better informed agent. The preferences of the agent and the principal about which project should be undertaken may be discordant. Moreover, the agent benefits from being granted more discretion in the project choice and may be motivated by reciprocity. We find that the relationship between the agent’s reciprocity and discretion crucially depends on the conflict of interest with the principal. When preferences are more congruent (discordant), discretion is broader (more limited) if the agent is more reciprocal. Hence, reciprocity mitigates (exacerbates) a mild (severe) conflict of interest. We also present supportive evidence for the predictions of our model using the German Socio-Economic Panel dataset. (JEL D03, D82, D86)