In defense of lawyers:: Moral hazard as an aid to cooperation

This paper studies strategic delegation in two-player contests for an indivisible prize (as in, e.g., litigation), where one party's probability of winning is determined by the relative investments of both. Even though neither player stands to gain anything from precommitment, both players ex ante prefer compulsory representation by agents (e.g., lawyers) whose efforts are unobservable. This delegation equilibrium is unaffected by secret renegotiation opportunities. Equivalently, it does not matter whether contracts are observable or not. Hence the paper points out a role for delegation with moral hazard in facilitating cooperation, an effect quite separate from precommitment. Classification Numbers: C72, D72, D82, K41. (C) 2000 Academic Press.