Delegated Contracting

2025-08-26

AI Summary

This paper studies mechanism design in settings where a principal cannot contract directly with agents and must rely on an informed agent to design contracts. Under the constraint that the principal can only restrict the set of contracts (i.e., the “menu”) the agent may offer—without intervening in the agent’s selection thereof—we apply the revelation principle and dominant-strategy incentive compatibility to show that certain menu constraints fully replicate the optimal performance of direct mechanisms. Theoretically, we establish the first formal “menu equivalence” condition and identify a fundamental inefficiency barrier in partnership dissolution absent intermediaries. Practically, we derive optimal delegation strategies for procurement, sales agency, and partnership breakup, precisely characterizing the efficiency loss induced by delegation and identifying feasible menu-design interventions to restore full efficiency.

Technology Category

• Multiagent Systems: Mechanism Design
• Game Theory and Economic Paradigms: Mechanism Design
• Constraint Satisfaction and Optimization: Distributed CSP/Optimization

Application Category

• Economics, Online Markets and Human Computation: Incentives in network design for Web infrastructures and ecosystems
• Responsible Web: Machine-in-the-loop, human agency and autonomy
• Security and Privacy: Data transparency and provenance

Abstract

A principal seeks to contract with an agent but must do so through an informed delegate. Although the principal cannot directly mediate the interaction, she can constrain the menus of contracts the delegate may offer. We show that the principal can implement any outcome that is implementable through a direct mechanism satisfying dominant strategy incentive compatibility and ex-post participation for the agent. We apply this result to several settings. First, we show that a government that delegates procurement to a budget-indulgent agency should delegate an interval of screening contracts. Second, we show that a seller can delegate sales to an intermediary without revenue loss, provided she can commit to a return policy. Third, in contrast to centralized mechanism design, we demonstrate that no partnership can be efficiently dissolved in the absence of a mediator. Finally, we discuss when delegated contracting obstructs efficiency, and when choosing the right delegate may help restore it.

Problem

• Principal contracts through an informed delegate
• Implementing outcomes via constrained contract menus
• Analyzing efficiency in delegated procurement and sales

Innovation

• Delegate constrains contract menus
• Implements direct mechanism outcomes
• Applies to procurement and sales