Delegation as a Signal: Implicit Communication With Full Cooperation

Abstract

I examine the issue of implicit signaling of inexpressible types through delegation in a communication game with perfectly aligned preferences, two-sided private information, and communication frictions. A principal consults an agent to choose one of two actions. The principal has some tacit knowledge, which he cannot communicate, and may acquire some imperfect, costly signal about the state of the world. After observing the signal, the principal may choose to act or delegate to the agent, who observes the state of the world perfectly. Even if the principal's information acquisition and the signal are unobservable, the delegation, combined with private information, allows the agent to extract some information about the principal's tacit knowledge. I show that for a large class of parameters there exists an equilibrium, in which the agent (upon delegation) can correctly understand “cues” and tailor the action to the principal's needs. In particular, the agent's decision may be non-monotone in the state of the world.