Essays on Information Design and Contract Theory

Abstract

My dissertation delves into the dynamics of principal-agent interactions, where information provision, incentive mechanisms, and economic outcomes intertwine. The first chapter studies informational versus monetary incentives in learning. To influence learning by an agent, a principal can provide both informational incentive and monetary incentive. Starting from a common prior about whether a trade is good or bad for the agent, the principal can design a signal to generate public information, but the agent can also privately gather costly information himself. It shows that for extreme priors, trade occurs with certainty without information gathering: at one extreme, when the agent is convinced about being in a bad state, the principal only offers monetary incentives to ensure trade; at the other extreme, nothing has to be done and the trade always occurs. For intermediate priors, the principal uses information design to induce information gathering and the agent accepts the contract only if he gathers good information, generating a non-monotonic probability of trade on the equilibrium path. Compared to the case when only a signal design is possible, the principal may disclose less information (in Blackwell sense) when she can make use of both signal and transfer. The second chapter examines the effectiveness of ex-ante signal design and after-production auditing in an adverse selection model with effort and hold-up risk. The results show that when and only when investment cost is low, an ex-ante signal design is preferred. The difference in payoffs generated by these two methods depends on their ability to induce investment and the relative efficiency of the agent’s effort levels in the respective contracts. When the investment cost is low, the less downward-distorted low-type effort in a signal design contract generates more payoff for the principal. As the investment cost increases, auditing becomes a better information instrument when the effect of a decreasing investment probability outweighs the effect of a more efficient effort. In cases where it is too costly to induce investment, the principal may design a perfect signal design or impose a large punishment, which results in a complete hold-up. The third chapter investigates the interplay between information provision, payment schedules, and agent heterogeneity in a principal-agent model. It analyzes a scenario where the principal aims to screen agents with different types, particularly a safe type and a risky type with technology dependent on the state of the world. When the safe-type agent has the incentive to mimic the risky type and the probability of encountering the safe type is low, the principal offers perfect information to the risky type, allowing both parties to know the true state after signal observation. As the probability of encountering the safe type increases, the principal further distorts the risky type’s quantities to extract more rent, and an imperfect signal is introduced to manipulate the agent’s beliefs. In this framework, the principal has the capacity to extract all information rent from agents of both types, primarily by adjusting their relative costs through signal design.