HEC Research Papers Series,
HEC Paris

Abstract: This paper analyzes the incentives that arise within an organization when communication is restricted to a particular network structure (e.g., a hierarchy). We show that restricting communication between the principal and agents may create incentives for the agents to misbehave when transmitting information and tasks throughout the organization. To remedy this issue, we provide necessary and sufficient conditions on the topology of the network of communication such that restricting communication to a particular network does not restrict the set of outcomes that the principal could otherwise achieve. We show that for any underlying incentives and any outcome available when communication is unrestricted, there exists a communication scheme restricted to a particular network that implements this outcome (i.e., does not induce agents to misbehave in the communication phase) if and only if that network satisfies our conditions.

Keywords: Communication; Incentives; Principal Agent; Information Transmission; Communication Networks; Organizational Behaviour; Correlated Equilibrium; Communication Equilibrium; Secure Communication

JEL-codes: C72; D83

66 pages, October 1, 2015

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