Staff Reports
Signaling with Private Monitoring
Number 994
December 2021

JEL classification: C73, D82, D83

Authors: Gonzalo Cisternas and Aaron Kolb

We study dynamic signaling when the informed party does not observe the signals generated by her actions. A forward-looking sender signals her type continuously over time to a myopic receiver who privately monitors her behavior; in turn, the receiver transmits his private inferences back through an imperfect public signal of his actions. Preferences are linear-quadratic and the information structure is Gaussian. We construct linear Markov equilibria using belief states up to the sender's second-order belief. Because of the private monitoring, this state is an explicit function of the sender's past play, leading to a novel separation effect through the second-order belief channel. Applications to models of organizations and reputation are examined.

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AUTHOR DISCLOSURE STATEMENT(S)
Gonzalo Cisternas
The author declares that he has no relevant or material financial interests that relate to the research described in this paper.

Aaron Kolb
The author declares that he has no relevant or material financial interests that relate to the research described in this paper.
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