Dynamic Mediation and Moral Hazard: From Private To Public Communication

I characterize optimal mediation dynamics with fixed discounting in a moral hazard model where a long-lived worker interacts with short-lived clients. I show that optimal mediation yields a nonstationary correlated information structure that transitions from private to public communication over time. In early periods, it occasionally creates information asymmetry about future play between the worker and the clients by randomizing over two continuations, with the realization privately revealed to the worker. In one, the worker shirks with impunity. In the other, the worker exerts effort subject to minimal punishment for underperformance. Eventually, optimal mediation prescribes only public communication that induces carrot-and-stick incentives.