Communication with Discretion

The separation of information and control is a key source of inefficiency that besets most large organizations. Traditional remedies involve either communication or delegation. However, the two need not be mutually exclusive. We examine in this paper how discretion (or informal funding) affects communication, the optimal designing of discretion, and how the answers depend on the costs of allowing discretion on the principal. We present a model of cheap talk with a mutual effort from both the principal and agent. By choosing the cost of informal funding to the agent, the principal affects the level of discretion ex-ante. We show that the more discretion the agent has, the better the communication. In other words, discretion can facilitate rather than harm communication. Moreover, and maybe interestingly, we find the more costly it is for the principal to allow discretion, the more discretion will be given ex-ante. In such cases, communication actually improves, the principal makes more informed decisions, and less discretion will be wielded ex-post. We contribute to the literature by allowing the mutual existence of discretion and communication. And we discuss the optimal choice of discretion in a more general setting.
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