Rivalry among agents seeking large budgets
| Published date | 01 October 2018 |
| Author | Kimiko Terai,Amihai Glazer |
| Date | 01 October 2018 |
| DOI | 10.1177/0951629818791029 |
| Subject Matter | Articles |
Article
Journal of Theoretical Politics
2018, Vol.30(4) 388–409
ÓThe Author(s) 2018
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DOI: 10.1177/0951629818791029
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Rivalry among agents seeking
large budgets
Kimiko Terai
Keio University, Tokyo, Japan
Amihai Glazer
University of California,Irvine, USA
Abstract
An agent competing for resources from a principal may benefit from having the principal believe
that the agent shares his preferences, whereas the principal may prefer that agents reveal their
types, inducing a separating equilibrium. Such incentives are explored in a model with a principal
who sets a budget in two separate periods, and two different agents allocate that budget among
services. In the second period, the principal allocates a larger budget to the agent that he believes
is more likely to share his preferences. In the first period, each agent may behave strategically,
spending more on the service the principal prefers, thereby hiding the agent’s type; this benefits
the principal in the current period, but hurts him in the future because he does not know which
agent would spend in the way he prefers. The principal mayinduce separation by giving the agents
a large budget in the initial period,or by hiding his preferences from them.
Keywords
Budget; bureaucrats; delegation; hidden information; reputation
1. Introduction
A principal often wants an agent to behave in a particular way, but also wants an
agent to reveal his type. The problem significantly appears when a principal dele-
gates to agents spending decisions, with an agent’s preferences differing from the
principal’s. Here, we can think of Congress allocating a budget to the Federal
Corresponding author:
Kimiko Terai, Keio University, 2-15-45 Mita, Minato-ku,Tokyo 108-8345, Japan.
Email: kterai@econ.keio.ac.jp
Aviation Administration, with the Administration deciding where to allocate air
traffic personnel, how many hours each facility should be open, and so on. A state
legislature may give a budget to a state university, with the university deciding how
many faculty to hire in the humanities, how many in the social sciences, and so on.
Or, a central government may transfer funds to a local government, with the local
government deciding how to spend the budget.
The problem is most interesting when an agent prefers a large budget; this
assumption is consistent with much work, beginning with Niskanen (1971), which
assumes bureaucrats want to maximize their budgets. We shall consider two
agents, with different preferences about the services they can provide. The principal
also has preferences over the services. Each agent’s utility increases with his bud-
get, because it allows him to spend more on all services. In period 2, the principal
allocates whatever resources that remain after period 1 to the agent who more
likely shares his preferences. If the principal is unsure of an agent’s type, an agent’s
expected utility in period 2 increases with his reputation for sharing the principal’s
preferences. The agent may strategically allocate his budget in a way that
encourages the principal to give a larger budget in the next period; thus, the princi-
pal may not learn an agent’s type, giving a larger budget to the agent who would
spend on services the agent rather than the principal wants.
The analysis first shows the allocation of the total budget by the principal when
the principal knows the agents’ preferences. In each period he gives the funds to
the agents who share his preferences. We then consider a principal who does not
know the agents’ preferences, and we consider the agents’ incentives in period 1
when they know the principal’s preferences. An agent who reveals that his prefer-
ences differ from the principal’s, by spending on the service the agent prefers, risks
getting a small budget in period 2. Whether the benefit of sincere behavior is
greater than its cost depends on how much remains to be allocated in period 2. By
setting the aggregate budget left for period 2, the principal can affect the agents’
incentives to pool on his preferences. An increase in the aggregate budget allocated
in period 1 weakens the agents’ incentives to pool with the principal’s type. Thus,
the principal must spend more to induce a separating equilibrium in period 1.
When the budget required for a separating equilibrium is sufficiently large, the
principal may forgo inducing such separation. Separation may occur when the
principal may want to hide his preferences from the agents, because agents can
pool on his preferred policy only if they know his preferences. If the principal and
agents do not know each other’s preferences, the principal can induce a separating
equilibrium with a small budget.
The principal–agent problem we examine differs from the standard principal–
agent model which has the principal give the agent incentive payments. In the stan-
dard model, the payments do not affect what the agent can do, only what the agent
will choose to do. In our model, the payment made by the principal affects an
agent’s resources, and so affects what he can do, not only what he will want to do.
Though our analysis will speak of monetary budget allocations, a scarce resource
the principal controls can take other forms. For example, heads of different agen-
cies may seek face time with the President.
Terai and Glazer 389
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