Contracting with imperfect commitment and noisy communication |
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Authors: | Helmut Bester Roland Strausz |
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Institution: | Department of Economics, Free University Berlin, Boltzmannstr. 20, D-14195 Berlin, Germany |
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Abstract: | This paper provides new analytical tools for studying principal-agent problems with adverse selection and limited commitment. By allowing the principal to use general communication devices we overcome the literature's common, but overly restrictive focus on one-shot, direct communication. In addition, general communication devices solve two fundamental problems of contracting with imperfect commitment: First, they allow us to identify the ‘local downward’ incentive constraints as the relevant ones if the agent's preferences satisfy a single-crossing property. Second, we show how one may restrict the cardinality of the message spaces of the communication device. An example illustrates our arguments and the suboptimality of one-shot, direct communication. |
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Keywords: | D82 C72 |
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