Essays on strategic information transmission and contract theory

Rubanov, O (2016) Essays on strategic information transmission and contract theory. Doctoral thesis, University of London: London Business School.

Abstract

This thesis studies problems of asymmetric information with multiple agents. Each chapter models a different aspect of asymmetric information. In the first chapter, there is only one uninformed agent who gets messages from other informed agents. Here, the uninformed agent takes an action, but the informed agents do not take actions. In the second and the third chapters the situation is reversed. These chapters deal with moral hazard problems. In the second chapter, the informed party is the one taking the action, and the other parties need to incentives the informed party to take the right action. In the second chapter each informed agent is motivated by a principal, who is constrained to writing contracts based only on the rating of the agent. In the third chapter, every agent is informed about her own effort, but all other agents want to motivate her to work with a combination of shares and signal-based contracts. In the first chapter I address the problem of strategic information transmission, commonly referred to as "cheap talk". It was first introduced by Crawford and Sobel, who showed that there is only a limited amount of information that can be transmitted from an informed sender to an uninformed receiver. In this chapter it is shown that it is possible to achieve high precision of information transmission with multiple senders by constructing an equilibrium which converges to full revelation exponentially fast with the number of senders. The result is robust to small perturbations, unlike previous attempts to achieve full revelation with multiple senders in this setting. The equilibrium can also be constructed for multidimensional state-spaces and achieves arbitrarily high precision even if each sender is allowed to send only two types of messages. The second chapter studies a moral hazard problem with many principal- agent pairs where each agent takes an unobservable costly action which affects the payoff of his principal. Each principal receives a rating of her agent which is a discrete signal of the agent's effort. The ratings can also depend on the other agents' efforts. A notable special case of ratings is a rank-order tournament. In equilibrium, each principal offers her agent an optimal contract which determines a transfer from the principal to the agent given the agent's rating and the efforts of other agents. When the principals and agents are risk neutral, rank-order based contracts can be sufficient to achieve efficient levels of effort for all principals. Necessary and sufficient conditions for the implementability of different levels of efforts and the existence of symmetric equilibria are derived in this chapter. Also, an example is provided, where rank-order based contracts generate externalities that are welfare reducing and a planner can improve on the equilibrium contracts. Optimal ownership structure of firms is the topic of the third chapter. This chapter models a production process which requires inputs from several agents. The agents' efforts are costly and are only observed with noise. Each agent can be motivated by both a contract paying her depending on her performance, and by the claim of the profit of the firm she has through ownership of a share of the company. This chapter shows that it is optimal to allocate some shares to the workers, and derives conditions when it is optimal for the workers of the firm to own the entire enterprise.