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Contracting with Imperfect Commitment and Noisy Communication

  • Helmut Bester


  • Roland Strausz


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 probems 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 communi- cation device. An example illustrates our arguments and the suboptimality of one-shot, direct communication.

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