Jan Potters, Tilburg University
"Delegation with strategic complements and substitutes"
Abstract
We examine strategic delegation in a two-stage game. Principals set the incentives for their respective agents, and subsequently the agents choose the strategies in the underlying game. Equilibrium predicts that principals set cooperative incentives if the game is characterized by strategic complements and competitive incentives if the game is characterized by strategic substitutes. We set up a lab experiment to test these predictions. Results show that, as predicted, principals choose competitive incentives for their agents with strategic substitutes, but contrary to prediction, principals do not set cooperative incentives in the game with strategic complements. It turns out that agents behave more cooperatively with strategic complements than equilibrium would predict. This may explain why principals do not set cooperative incentives in this case.
Contact person: Johan Lagerlöf