Bayesian Persuasion and Moral Hazard

Abstract

We consider a three-player Bayesian persuasion game in which the sender designs a signal about an unknown state of the world, the agent exerts a private effort that determines the distribution of the underlying state, and the receiver takes an action after observing the signal and its realization. The sender must not only persuade the receiver to select a desirable action, but also incentivize the agent’s effort. We develop a general method of characterizing an optimal signal in this environment. We apply our method to derive concrete results in several natural examples and discuss their economic implications

Keywords: Bayesian persuasion; moral hazard; information design

JEL Classification: C72, D82, D83, D86, M31