MUTUAL MONITORING AND BEST AGENCY CONTRACTS

We consider the design of contracts in a principal-agent setting with two agents where each agent privately observes and reports to the prin cipal a signal regarding the actions taken. We consider two cases: one where the agents observe the same signal and one where the agents obs erve different signals. For each case we show that, under certain cond itions, truthful reporting and desired actions can be implemented at n o or nearly no additional compensation cost above that incurred when t he agents' signals are contractible public information.