Information and Intertemporal Signal Garbling in Relational Contract
Yuk-fai Fong*, Jin Li
Date: 2009-05-16 2:30 pm – 3:00 pm
Last modified: 2009-04-17
Abstract
We investigate the use of information in repeated principal-agent relationships with imperfect public monitoring and report three results. First, if we only consider information garbling within each period, then, consistent with Kandori (1992), efficiency of the relationship is increasing in the informativeness of the signal in the sense of Blackwell. Second, contrary to Abreu, Milgrom, and Pearce (1991), bundling signals across periods and then fully revealing them hurts efficiency of the relational contract. Third, and most importantly, we construct an alternative intertemporal signal garbling process that transforms the repeated relationship into one with private monitoring. The main finding of the paper is that in the transformed game, there exists a belief-based pure strategy equilibrium that can be more efficient than the optimal equilibrium in the original game with imperfect public monitoring.