Changes

In this section the paper first considers what would happen if the principal gave the agent the authority to choose policy in the first period, and then considers whether the principal would endogenously choose to do so.

In the GC game:

**Therefore the agent invests more heavily in capacity and realized implementation is higher, as compared with the standard GC model, particularly if the discount factor is low so the second period gets little weighting.

*<math>\hat{c}_1^* > c_1^*\,</math> and <math>\hat{z}_1^* > z_1^*\,</math>.

In the SC game:

**Choose <math>x_1 = x^A\,</math> and pay twice for the capacity investment that is only realized once (in period 2), but get some benefits from <math>x^A\,</math> in the first period.

**Choose <math>x_1 = x^A\,</math> and invest nothing, taking just the benefits from the first period - this can be particularly ideal if <math>\delta\,</math> is very low.

In choosing delegation endogenously:

*The payoffs from the two GC games (to the principal) are compared. Under "many functional assumptions" <math>P\,</math> is less likely to delegate as the distance between <math>x^A\,</math> and <math>x^P\,</math> diverge.

*In the SC game, delegating authority to the agent is weakly dominated.