by Radu Vranceanu
, 10.12.15
Decision makers often have no choice but to implement unpopular reforms and occasionally have to pay a high price for them in terms of declining popular support. Delegation can help reduce these negative consequences.
Nicolas Machiavelli outlined the merits of this solution five centuries ago. In his masterpiece, The Prince (1532), Machiavelli wrote, “Princes should delegate to others the enactment of unpopular measures…” Contemporary examples of such delegations abound. As depicted in the Hollywood block-buster Up in the Air (2010), George Clooney stars as an HR consultant who travels from town to town to “restructure” distressed firms and then leaves without a sigh. Many law and consulting companies specialize in this kind of staff restructuring advice.
At a higher decision level, in the aftermath of the sovereign debt crisis of 2010-2013, many European governments are passing badly needed but unpopular reforms (fiscal consolidation, increasing labor market flexibility), and many political leaders contend that their choices are being imposed by the “technocratic” European Commission. For many years, governments in developing countries blamed the “dictatorship” of the IMF or World Bank for imposing tough but much needed structural adjustments.
The mainstream literature in economics has emphasized that a decision-maker may consider it sensible to hire a delegate to take action on his behalf on the grounds of increased efficiency in a world with asymmetric information. In experimental economics, the analysis has shifted beyond efficiency motives to note that decision makers occasionally resort to delegation to “shift the blame” or “shirk on responsibility”, which in turn allows them to extract more surplus in negotiations. If delegation allows diffusing the principal’s responsibility and shifts the balance of a negotiation in his favor, then a principal might falsely claim that he delegated the decision in order to reap the benefits related to the transfer of authority while simultaneously avoiding the risk that the delegate will pursue different golas from his own. He would thus buy the services of a “false delegate” who will serve as a “straw man”.
In their paper “Lying about Delegation” in the Journal of Economic Behavior and Organization (Elsevier) – forthcoming 2016, Angela Sutan (ESC Bourgogne) and Radu Vranceanu (ESSEC) develop a variant of the classical “ultimatum game experiment” to study whether individuals would lie about delegation and how potential delegates would behave when asked to play a “scapegoat” role. In particular, the Principal or Proposer can lie that he has delegated the allocation decision to a third party, the Delegate, while he has actually made the decision himself. Of course, he also can tell the truth. The message is genuine “cheap talk”, in the sense that it is not binding and the Responder has no means to verify it.
As in a standard ultimatum game, in their experiment the Responder can accept or reject the offer. When delegation is authentic, the delegate has an active role: he determines the split of the pie between the Proposer and the Responder. When the Proposer lies about delegation, the delegate acts as a “scapegoat”; he makes no decision and merely represents a straw man who serves as an alibi for the principal.
The goal of the experiment is twofold. First, it is intended to contribute to the literature on lying and deception by analyzing a specific lie concerning delegation. After a large number of tests run in the Experimental Labs of ESC Dijon and ESSEC with paid participants, it turned out that a large number of subjects do adopt the “false delegation” strategy, claiming that they delegate the spilt of the pie but actually taking the decision themselves. Second, the paper also analyzes the behavior of the Delegate in interaction with the Proposer. Interestingly, a non-negligible number of Delegates refuse to occupy the morally ambiguous scapegoat role; they simply do not wish to be “accomplices” of a dishonest Proposer. As there are “naturally” honest Proposers, there are “naturally” honest Delegates. The acceptance rate of the poor offer by the Responder is the largest in this context.
These results shed some light on the role of external advisors hired by decision makers when they must pass unpopular reforms. They confirm that policymakers might not only try to “shift the blame”, as shown by existing experimental economic studies, but some of the observed “blame shift” might be spurious; the “expert” merely plays a scapegoat role with no real decision-making power. While immoral, this situation is not necessarily bad for those who will bear the costs and benefits of the reform. In the ultimatum game, the Proposer wishes to manipulate the Responder and extract additional rent at the expense of the Responder. In this case, the outcome is clear: the Responder will lose something. However, in some cases, the Proposer wishes to implement a reform that might be helpful in the long run (for the firm or the economy) but encounters strong resistance in the short run. Using a scapegoat to pass an unpopular but necessary reform is much less harmful from an ethical perspective.
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