Organizational theory suggests that authority should lie in the hands of those with information, yet the power to transfer authority is rarely absolute in practice. We investigate the validity and application of this advice in a model of optimal contracting between an uninformed principal and informed agent where the principal's commitment power is imperfect. We show that while full alignment of interests combined with delegation of authority is feasible, it is never optimal. The optimal contract is "bang-bang"---in one region of the state space, full alignment takes place, in the other, no alignment takes place. We then compare these contracts to those in which the principal has full commitment power as well as to several "informal" institutional arrangements.
We study optimal contracts between a decison maker and an expert where the decison maker can commit to make transfer to the expert contingent on his advice but cannot commit to take an action contingent on advice. We show that optimal contracts never entail full revelation. Instead, the decision maker pays the expert to reveal for some states and doesn't compensate the expert at all in others.
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