Working Paper No. 1171

Delegation to a Rationally Inattentive Agent

Published: May 22, 2017, revised November 2017Pages: 41Keywords: Delegation; Investment; ; Information aquisition; Rational inattention; Contract; Bonus; PenaltyJEL-codes: D01; D82; D86; G11; G23; G30

Delegation to a Rationally Inattentive Agent Assar Lindbeck and Jörgen Weibull

In the political debate, lavish bonus schemes to managers in large corporations are often questioned on moral grounds as well as in terms of economic efficiency. Can high bonuses, sometimes even after ex post unprofitable decisions, be motivated from first principles in economics? We analyze this question through the prism of a model in which an investor delegates information acquisition and investment decisions to a rationally inattentive agent. The agent’s effort to acquire information is private, as is the information obtained and its quality. We identify a class of optimal contracts for such situations, and show that not even in the case of a risk-neutral agent is it in the principal’s interest to perfectly align the agent’s incentives with her own. Morover, unlike practice, optimal contracts include penalties as well as bonuses. Due to limited-liability, risk-neutral agents’ contracts will be asymmetric in the direction of rewarding profitable investments more than penalizing unprofitable investments, and may in fact reward the agent after unprofitable investments.

Assar Lindbeck


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