Contracting Outcomes with Communication and Learning

Abstract We show that allowing simple communication can enhance tendencies for optimal choices and increase efficiency in a multitask, incomplete contracting, principal agent setting. The communication protocol, by asking principals to communicate requests to the agent regarding non-contractible choices, promotes greater deliberation and faster learning, and thereby results in superior outcomes. The benefits accrue mainly due to changes in the choices of principals, who issue communication, rather than agents. Coordination is promoted, and learning subdued, when the communication protocol permits promises and ex post payments, in addition to allowing a request. This protocol also increases efficiency, with the efficiency gains equal across the protocols. However, a reduction in the degree of incompleteness in contracting yields larger efficiency gains than induced by any communication protocol.