The Value of Correlated Signals in Agencies

Madhav V. Rajan and Bharat Sarath

RAND Journal of Economics, 1997, vol. 28, issue 1, 150-167

Abstract: We analyze optimal correlation levels in information technologies when multiple signals are available as contracting mechanisms within the principal-agent paradigm. We identify sufficient conditions ensuring that uniformly lower-correlation functions (in action levels) are preferred, as well as (mutually disjoint) sufficient conditions for a higher-correlation function to be preferred. We also show that if correlation levels are invariant in the agent's action choice, the preference is for negative correlation, but not perfectly negative correlation. We generalize techniques originally used for proving Blackwell's theorem and show that our results extend to the decision context as well.

Date: 1997
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