Nishant Ravi

I study a dynamic principal-agent relationship in which the principal invests costly resources in a project of uncertain quality to induce costly effort from an agent. The principal observes the output from the project privately and can be either informed (has learned that project quality is high) or uninformed. The agent learns about project quality through the investments made by the principal. The principal wants to invest less when pessimistic about project quality; however, the agent demands higher investment when pessimistic to exert effort. The principal faces the trade-off between investing optimally and transmitting information about project quality to the agent. The principal's optimal equilibrium features full information transmission when the uninformed principal has high beliefs (probability that project quality is high) and no information transmission at low beliefs. The informed principal may invest at sub-optimally high levels early in the relationship, but eventually, optimality is restored. That is, the principal's optimal equilibrium may exhibit distortions in the short run but not in the long run.

I study a repeated cheap talk environment in which a principal who has state-dependent preferences chooses an action in every period based on the recommendation of an agent who is better informed (not perfectly) about the state.  Both action and state spaces are binary and the state is i.i.d. distributed in every period. The agent has state independent preferences and prefers one action over the other.  At the end of every period, the realized state is revealed to both parties.  I show that under full commitment, in the principal’s optimal mechanism if the agent recommends his preferred action, the agent may be punished even if the recommendation is correct. However, if the agent recommends his non-preferred action, the principal rewards the agent ignoring the realization of the state.