The Use of Information in Relational Contracts

Abstract

We investigate the use of information in repeated principal-agent game and report three results. First, consistent with Kandori (1992), garbling signals within each period hurts the efficiency of the game. Second, contrary to Abreu, Milgrom, and Pearce (1991), bundling signals across periods and then fully revealing them never increases the efficiency of the game. Third, and most importantly, we construct an intertemporal garbling of signals that transforms the repeated game into one with private information. The main finding of the paper is that in the transformed game, there exists a belief-based pure- strategy equilibrium that can be more efficient than the optimal equilibrium in the original game with imperfect public monitoring.