Interference : Contracts and Authority with Insecure Communication ∗

We develop a theory of mechanism design when agents are able to interfere with each others’ communication channels. We develop a kind of revelation principle, the “Noninterference Principle” which permits representation of arbitrary mechanisms by direct ones. The incentives to interfere will depend on the mechanism chosen; interference thus constrains contractual design. For instance, authority emerges as a governance mechanism which may economize on the costs of securing channels, particularly when the organization needs to be flexible and there is diversity in its members’ preferences. We also show that there are environments in which the possibility of interference actually facilitates full implementation by providing a means of “protest” in undesired equilibria.