Ignacio Monzón (CCA and UniTO)

Mediation in Dynamic Contracting

Abstract: We study communication in dynamic contracting with limited commitment. A firm and a worker interact over time. The worker is privately informed about his productivity. In each period, the firm offers a menu of short-term contracts. The interaction between the firm and the worker continues provided that the worker accepts a contract and finishes otherwise. We let the parties communicate through a trustworthy mediator. We allow for a class of natural and simple communication protocols (good news, bad news or both). We characterize the optimal communication protocol for the firm. We find that it is optimal to only use bad news and to reveal information gradually.

Joint work with Doruk Cetemen, Dino Gerardi and Lucas Maestri