Signaling with Private Monitoring

Gonzalo Cisternas and Aaron Kolb ()
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Aaron Kolb: https://kelley.iu.edu/faculty-research/faculty-directory/profile.html?id=KOLBA

No 994, Staff Reports from Federal Reserve Bank of New York

Abstract: A sender signals her private information to a receiver who privately monitors the sender’s behavior, while the receiver transmits his private inferences back through an imperfect public signal of his actions. In a linear-quadratic-Gaussian setup in continuous time, we construct linear Markov equilibria, where the state variables are the players’ beliefs up to the sender’s second order belief. This state is an explicit function of the sender’s past play—hence, her private information—which leads to separation through the second-order belief channel. We examine the implications of this effect in models of organizations, reputation, and trading. We also provide a fixed-point technique for finding solutions to systems of ordinary differential equations with a mix of initial and terminal conditions, and that can be applied to other dynamic settings.

Keywords: signaling; private monitoring; continuous time (search for similar items in EconPapers)
JEL-codes: C73 D82 D83 (search for similar items in EconPapers)
Pages: 60
Date: 2021-12-01
New Economics Papers: this item is included in nep-cta, nep-gth and nep-mic
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Working Paper: Signaling with Private Monitoring (2020)
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