Delegated Contracting

Abstract

A principal contracts with an agent through an informed delegate. Although the principal cannot directly mediate the interaction, she can restrict the menus of contracts the delegate may offer. We characterize the outcomes implementable through delegated contracting: they are exactly those achievable by a centralized Bayesian mechanism that is dominant-strategy incentive compatible and ex-post individually rational for the agent. We use this result to identify the optimal contractual restrictions in several settings. First, an organization that procures through a budget-indulgent agency should grant full flexibility below an expected spending cap. Second, unlike centralized mechanisms, delegated contracting can never dissolve partnerships efficiently, highlighting a limit to delegated authority. Finally, a seller can entrust sales to an intermediary without revenue loss by combining a resale price agreement with a buyback policy.