CREED Seminars Amsterdam

Heikki Rantakari (University of Rochester, United States)
Thursday, 15 June 2017

An uninformed principal elicits non-contractible recommendations from a privately informed agent regarding the quality of projects. The agent is biased in favor of implementation and no credible communication is possible in a one-shot setting. In a repeated setting, the fear of losing future influence can sustain informative communication, but the agent’s willingness to remain truthful depends on the extent to which he expects the principal to listen to him. In a stationary equilibrium, the principal always implements mediocre projects at a sub-optimally high frequency to reward honesty, while she may either favor or discriminate against high- quality projects. In a non-stationary equilibrium, the principal will further condition the agent’s future influence on today’s proposals, with the admission of mediocre alternatives rewarded with increased future influence while rejections of high-quality projects are further punished by lowering the agent’s future influence. The acceptance of high-quality projects builds up influence when the agent’s current influence is not too high, but erodes the influence when the agent is already highly influential.