Revocable Delegation: Selective Overruling under Double-Sided Information Asymmetry

We develop a theory of revocable delegation in organizations. Building on Aghion and Tirole (1997), we argue that an informed principal should not always overrule an agent’s recommendation, even when intervention raises current payoff. Overruling has two opposing effects: it discourages initiative by reducing the agent’s expected implementation authority, but it also disciplines corner-cutting by making discretion revocable. We incorporate loss aversion to show that being overruled is experienced as a psychologically salient loss, which sharpens both effects. The principal therefore optimally chooses selective rather than systematic intervention. The model links authority, incomplete contracts, and behavioral economics, and offers a unified account of why effective organizations often rely on controlled opacity rather than full transparency or unconditional delegation.