The Value of Correlated Signals in Agencies

RAND JOURNAL OF ECONOMICS, Vol 28 No 1

Posted: 5 Mar 1997

See all articles by Madhav V. Rajan

Madhav V. Rajan

Booth School of Business, University of Chicago

Bharat Sarath

Rutgers, The State University of New Jersey - Accounting

Abstract

We analyze optimal correlation levels in information technologies when multiple signals are available as contracting mechanisms within the principal-agent paradigm. We identify sufficient conditions ensuring that uniformly lower-correlation functions (in action levels) are preferred, as well as (mutually disjoint) sufficient conditions for a higher-correlation function to be preferred. We also show that if correlation levels are invariant in the agent's action choice, the preference is for negative correlation, but not perfectly negative correlation. We generalize techniques originally used for proving Blackwell's theorem and show that our results extend to the decision context as well.

JEL Classification: D82, D83

Suggested Citation

Rajan, Madhav V. and Sarath, Bharat Sarrukai, The Value of Correlated Signals in Agencies. RAND JOURNAL OF ECONOMICS, Vol 28 No 1. Available at SSRN: https://ssrn.com/abstract=3774

Madhav V. Rajan

Booth School of Business, University of Chicago

1101 East 58th Street
Chicago, IL 60637-1561
United States

Bharat Sarrukai Sarath (Contact Author)

Rutgers, The State University of New Jersey - Accounting ( email )

94 Rockafeller Road
Piscataway, NJ 08854
United States

Register to save articles to
your library

Register

Paper statistics

Abstract Views
617
PlumX Metrics