Equilibrium Informativeness in Veto-Based Delegation

Models of veto-based delegation have seen limited use in applications despite their potential relevance, perhaps because the equilibrium set is not wellunderstood. We demonstrate that every equilibrium can be constructed by a simple algorithm, and use this algorithm to identify the most informative equilibrium in a setting that includes that of Krishna and Morgan (2001). We show the Krishna and Morgan equilibrium is most informative in their parameter space and strengthen Dessein’s (2002) result comparing full and veto-based delegation. In an application, we study the identified equilibrium in the context of the relationship between an uninformed patient and a doctor with a financial incentive to overtreat. The doctor’s bias harms the patient both through excessive treatment and uninformative communication, and we show the latter may be the stronger effect. Insurance reduces the gap in doctor and patient financial incentives and thereby improves communication to the benefit of both sides.