In a one principal two-agent model with adverse selection and collusion among agents, we show that delegating to one agent the right to subcontract with the other agent always earns lower profit for the principal compared with centralized contracting. Delegation to an intermediary is also not in the principal’s interest if the agents supply substitutes. It can be beneficial if the agents produce complements and the intermediary is well informed. Earlier versions of this paper have previously been circulated under different

We consider mechanism design in which message sets are restricted owing to communication costs, preventing full revelation of information. A principal contracts with multiple agents each supplying a one-dimensional good at a privately known cost. We characterize optimal mechanisms subject to incentive and communication constraints, without imposing arbitrary restrictions on the number of communication rounds. We show that mechanisms that centralize production decisions are strictly dominated by those that decentralize decision-making authority to agents, and optimal communication mechanisms maximize information exchanged directly among agents. Conditions are provided for these to involve gradual release of information over multiple rounds either simultaneously or sequentially.