Report

Signaling with Private Monitoring


Abstract: We study dynamic signaling when the informed party does not observe the signals generated by her actions. A forward-looking sender signals her type continuously over time to a myopic receiver who privately monitors her behavior; in turn, the receiver transmits his private inferences back through an imperfect public signal of his actions. Preferences are linear-quadratic and the information structure is Gaussian. We construct linear Markov equilibria using belief states up to the sender's second-order belief. Because of the private monitoring, this state is an explicit function of the sender's past play, leading to a novel separation effect through the second-order belief channel. Applications to models of organizations and reputation are examined.

Keywords: signaling; private monitoring; continuous time;

JEL Classification: C73; D82; D83;

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Bibliographic Information

Provider: Federal Reserve Bank of New York

Part of Series: Staff Reports

Publication Date: 2021-12-01

Number: 994