Incomplete contracts versus communication

Andreas Blume, Inga Deimen and Sean Inoue

Journal of Economic Theory, 2022, vol. 205, issue C

Abstract: We consider a principal's choice between either controlling an agent's action through an incomplete contract or guiding him through non-binding communication. The principal anticipates receiving private information and must hire an agent to take an action on her behalf. Contracts can only specify a limited number of actions as a function of the state. The principal is at liberty not to specify actions for some of the states. States not covered by the contract induce a communication game. Contract clauses create gaps in the state space of the communication game, which can be used to generate distance between communication events. This relaxes incentive constraints for communication, helping enable and structure influential communication. We find that close alignment of interests favors communication and, thus, ceding authority to the agent, while strong misalignment favors reliance on contracts. In the uniform-quadratic environment, optimal contracts that induce influential communication split the communication region: there are at least two communication actions separated by contract actions. For sufficiently closely aligned interests, it is also the case that communication splits the contract region: there are at least two contract actions separated by a communication action.

Keywords: Strategic communication; Cheap talk; Incomplete contracts (search for similar items in EconPapers)
JEL-codes: D82 D83 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S002205312200134X
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:205:y:2022:i:c:s002205312200134x

DOI: 10.1016/j.jet.2022.105544

Access Statistics for this article

Journal of Economic Theory is currently edited by A. Lizzeri and K. Shell

More articles in Journal of Economic Theory from Elsevier
Bibliographic data for series maintained by Catherine Liu ().