ARMS LENGTH RELATIONSHIPS

We show that lowering the cost of acquisition of information that a pr incipal obtains about the performance of an agent may make it more dif ficult for the principal to commit to threats. Hence it will weaken in centives and can therefore be counterproductive. This phenomenon is ex plored in a framework where improving the quality of information makes a commitment not to renegotiate less credible. Applications to the th eory of the firm are briefly explored.