Principal-Agent Problem with Third Party: Information Design from Social Planner's Perspective

Abstract

We study the principal-agent problem with a third party that we call social planner, whose responsibility is to reconcile the conflicts of interest between the two players and induce socially optimal outcome in terms of some given social utility function. The social planner owns no contractual power but manages to control the information flow between the principal and the agent. We design a simple workflow with two stages for the social planner. In the first stage, the problem is reformulated as an optimization problem whose solution is the optimal utility profile. In the second stage, we investigate information design and show that binary-signal information structure suffices to induce the socially optimal outcome determined in the first stage. The simplicity and modularity of our method make it easy to implement in various scenarios within the principal-agent problem.