Information and Timing in the Theory of Repeated Moral Hazard

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In many economic settings the efficiency of explicit and implicit contractual arrangements is limited by the presence of imperfect monitoring: some agents cannot observe perfectly the actions of others. Often the economic problem of interest involves the indefinite repetition of some strategic situation such as an oligopoly, a partnership, or any organizational hierarchy. Cooperation in such problems depends upon the participants responding aggressively to indications that not all participants are honoring the implicit agreement. It would seem then that the possibilities for cooperation are enhanced when signals related to players' behavior are observed without delay, and when players can respond quickly to new information. Under their previous grant the investigators demonstrated that the opposite is true. Cooperation is enhanced by delays in the observation of signals and slower reaction speeds for players. The delays and slower reaction speeds made it possible to use a single punishment to deter a multitude of different potential deviations from the implicit agreement. This is described as "reusable punishments." Exploiting reusability enhances organizational efficiency dramatically. In their previous work the investigators used standard repeated games with discounting. These games assume a fixed frequency with which players take actions and fixed frequency with which players receive information regarding the play of the game. The contribution of this grant comes from relaxing these assumptions, studying information flow in other problems, and generalizing the results into a new theory of organizational design. The new topics considered include implicit contract theory in competitive markets, renegotiation in supergames, strategic complexity, partial moral hazard in repeated agency, and the strategic dynamics of collusion in markets with renewable resources.