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Information design in the principal-agent problem

Author

Listed:
  • Babichenko, Yakov
  • Talgam-Cohen, Inbal
  • Xu, Haifeng
  • Zabarnyi, Konstantin

Abstract

We study a variant of the principal-agent problem in which the principal does not directly observe the agent's effort outcome; rather, she gets a signal about the agent's action according to a variable information structure designed by a regulator. We consider both the case of a risk-neutral and of a risk-averse agent, focusing mainly on a setting with a limited liability assumption. We provide a clean characterization for implementability of actions and utility profiles by any information structure, which turns out to be simple thresholds on the utilities. We further study naturally-constrained information structures in which the signal emitted from any action is either the action itself or some actions nearby. We show that the worst implementable welfare deteriorates gracefully as the information structure becomes noisier. In a more general class of signaling constraints, we prove that deciding whether a certain action is implementable is NP-complete.

Suggested Citation

  • Babichenko, Yakov & Talgam-Cohen, Inbal & Xu, Haifeng & Zabarnyi, Konstantin, 2026. "Information design in the principal-agent problem," Games and Economic Behavior, Elsevier, vol. 155(C), pages 55-69.
    • Handle: RePEc:eee:gamebe:v:155:y:2026:i:c:p:55-69
    DOI: 10.1016/j.geb.2025.10.003
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    References listed on IDEAS

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