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Contracting with Imperfect Commitment and Noisy Communication

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Author Info
Helmut Bester (Free University Berlin, Department of Economics, Boltzmannstr. 20, D-14195 Berlin)
Roland Strausz (Free University Berlin, Department of Economics, Boltzmannstr. 20, D-14195 Berlin)

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Abstract

This paper provides an analytical framework for studying principal-agent problems with adverse selection and limited commitment. By allowing the principal to use noisy communication we solve two fundamental problems of contracting with imperfect commitment: First, we identify the relevant incentive constraints by showing that only ‘local’ constraints are binding if the agent’s preferences satisfy a single–crossing property. Second, we show that one can restrict the dimensionality of the message spaces of the communication device to the number of the agent’s types. As we illustrate in an example, these findings allow us to derive the optimal contract by a similar procedure as in contracting problems with full commitment.

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Publisher Info
Paper provided by SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich in its series Discussion Papers with number 2.

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Date of creation: Dec 2003
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Handle: RePEc:trf:wpaper:2

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Related research
Keywords: contract theory; communication; imperfect commitment; adverse selection;

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Find related papers by JEL classification:
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    Other versions:
    • Robert J. Aumann & Sergiu Hart, 2002. "Long Cheap Talk," Discussion Paper Series dp284, Center for Rationality and Interactive Decision Theory, Hebrew University, Jerusalem, revised Nov 2002. [Downloadable!]
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  14. Kay Mitusch & Roland Strausz, 2005. "Mediation in Situations of Conflict and Limited Commitment," Journal of Law, Economics and Organization, Oxford University Press, vol. 21(2), pages 467-500, October. [Downloadable!] (restricted)
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  24. Dewatripont, Mathias, 1989. "Renegotiation and Information Revelation over Time: The Case of Optimal Labor Contracts," The Quarterly Journal of Economics, MIT Press, vol. 104(3), pages 589-619, August. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Vasiliki Skreta, 2005. "Sequentially Optimal Mechanisms," UCLA Economics Online Papers 342, UCLA Department of Economics. [Downloadable!]
  2. Helmut Bester, 2005. "Externalities, Communication and the Allocation of Decision Rights," Discussion Papers 69, SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich. [Downloadable!]
    Other versions:
  3. Shirley J. , HO, 2007. "R&D Outsourcing Contract with Information Leakage," Discussion Papers (ECON - Département des Sciences Economiques) 2007026, Université catholique de Louvain, Département des Sciences Economiques. [Downloadable!]
  4. Helmut Bester & Daniel Krähmer, 2008. "Exit Options in Incomplete Contracts with Asymmetric Information," Discussion Papers 251, SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich. [Downloadable!]
    Other versions:
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