Economic Theory Seminar Series: Achieving Efficiency in Repeated Partnerships via Information Design

Two partners contribute to a common project over time. The value of the project is determined by the aggregate effort of the partners and by a common productivity parameter that each partner is privately informed about. At each instant, the two partners observe a noisy public signal of the total effort. An equilibrium of this game is Markov if effort choices of agents depend only on the beliefs about the value of the project and on calendar time. I characterize the unique symmetric linear Markov equilibrium as the solution to a nonlinear boundary value problem. The equilibrium features a mutual encouragement effect, as agents exaggerate their effort in order to signal their private information, which counteracts free-riding incentives. Indeed, if the project lasts sufficiently long, the diffused information structure approximates the first-best in terms of welfare. If, instead of distributed private information, one agent has all the information about the productivity parameter, the excessive signalling effect is accentuated. As a result, the centralized information structure can yield output levels above the first best.