Strategic Delegation in Firms and in the Trade Union

Many economic games are played by delegates, or agents, acting on behalf of their principals, who are the main interested parties.

Since the seminal paper by Coase (1937) the firm and the market have been recognised as alternative institutions through which to organise economic activity. However, there is not such a thing as “the firm”. Firms are different from each other and their internal organisation should not be taken as an exogenous variable. Furthermore, firms do not exist in isolation; they interact with each other within markets. The structure of the market the firm is operating in influences its internal organisation, and in particular the way in which the incentives for the different parties contributing to the firm activity are designed. This is, of course, especially true when the actions taken by one firm have an influence on the behaviour of its rivals, i.e. in oligopolistic markets, where firms interact strategically. In those circumstances firms can take decisions allowing them to commit to a particular course of action and gain a strategic advantage upon rivals.

Co-operation is easier to attain, when the players are able to observe each other. Contracts, like other institutions, can be used by economic agents to become more observable, state their intentions and define their role. In this chapter, we analyse the possibility that incentive contracts for delegates could be used by principals to sustain co-operation, studying an application to Cournot oligopoly. It is shown that collusion is a sub-game perfect equilibrium of a Cournot duopoly game between two firms, where, as in the previous chapter, the choice of output is delegated by each owner to a manager, and the managers’ incentive schemes are observable and renegotiable.

After having seen strategic delegation at work within firms, in this chapter we study how it may affect the organisation and the activity of the trade union.

In previous chapters, we considered different settings where strategic delegation is used by principals to change the equilibrium outcomes of the delegated games. However, the payoff structure of such games is not changed by the act of delegation itself. In this chapter, I study the case where the act of delegation changes the delegated game’s payoffs, so that a sequence of delegation decisions have a dynamic effect, shaping the evolution of the strategic interaction that the principal is involved in. Principals compete between each other to acquire new delegates as they become available, and this competition modifies their relative strategic strength over time.

In this book I have attempted to contribute to our understanding of the phenomenon of strategic delegation, with particular reference to the organisation of firms and of the trade union, and to its welfare implications. I have discussed how different market and non-market relations involving delegates connect to each other. In chapters 2 and 3 I have considered how the need to delegate decisions concerning the product market to managers, and to compensate them through incentive contracts, modifies firms’ strategy space and allows them to attain equilibria that are different from the one which would have been reached were the owners directly playing the product market game.