Reputation with Endogenous Information

In this paper I study a dynamic game between a principal, who has to take a decision every period, and an informed agent whose preferences over the decision are his private information. The decision maker cannot decide on the employment status of the agent but she has access to a costly monitoring technology that (potentially) allows her to learn whether the agent has revealed his information truthfully before taking a decision. I show that in an infinite horizon version of this model, the principal’s incentives to actively monitor are reduced by the reputational concerns of the agent. In particular, I show that in anyMarkov Perfect Equilibrium the principalmonitors less and the agent liesmore often when the principal has long-runmotivations if she believes that the agent is bad with sufficiently high probability. The reason is that when the type of the agent is uncertain, the principal can free-ride on his reputational concern, but once she discovers his type, this benefit is gone.