THE INTERACTION BETWEEN DECISION AND CONTROL-PROBLEMS AND THE VALUE OF INFORMATION

This paper studies information system design in a model of double mora l hazard in which there is both a decision problem and a control probl em. If either problem is considered in isolation, an information syste m that provides more public information is preferred. However, an info rmation system that provides less public information can, in fact, be desirable because of an interaction between the two problems. The bene fit of choosing an information system that provides less information i s that it serves as a substitute for commitment for the principal. The cost is that neither the principal's decision (act) nor the agent's p ayments can be conditioned on the information. We provide sufficient c onditions under which less information and more information are each o ptimal.