Budgets Under Delegation

Abstract

Consider a principal who sets a budget that the agent allocates among different services. Because the preferences of the agent may differ from those of the principal, the budget the principal sets can be lower or higher than in the first-best solution. When the principal is uncertain about the agent's preferences, the agent may choose an allocation that signals his type, thereby affecting the size of the budget the principal will set in the following period. The equilibrium may have separation or pooling. In a pooling equilibrium, the agent may misrepresent his preferences, aiming to get a large budget in the future period.

Rivalry among agents seeking large budgets

“…The following analysis builds on Terai and Glazer (2015) in considering how reputation affects budgetary allocations made by a principal. Unlike that paper, however, the concern here is on the principal’s actions rather than of the agents, including how the principal will allocate a fixed budget over two periods, and on whether the principal benefits from hiding his preferences.…”