Transfer of Authority within Hierarchy

Bureaucracy is featured by vertical hierarchical structure in which the decision maker usually lacks direct access to informed agent, and the span of discretionary authority decreases top down. In this paper we analyze the performance of delegation mechanism in three-level hierarchies. The decision maker needs to delegate authority to a biased mediator, then the mediator makes further delegation decision. We provide a full characterization of the implemented delegation set. It's shown that the optimal outcome is implementable via delegation if and only if the mediator's bias lies between the DM and the sender. We then compare the performance of delegation with communication (mediator cheap talk), and reverse the conclusion in Dessein (2002) that delegation generates higher ex ante expected payoff than cheap talk. Therefore, the inability to access agent, in additional to commitment cost and ex post temptation to renege, is identified as a new reason for the observed absence of commitment.