Interim Performance Measures and Private Information

This study investigates whether having an upstream or downstream agent privately observe an interim performance measure and disseminating this measure to the other agent is valuable to the principal. The signal is informative about the upstream agent’s action and positively correlated with output. If the upstream agent privately observes the signal, there can be a higher cost of the downstream agent if the signal is sufficiently forward-looking. If the downstream agent privately observes the signal, the tradeoff involves rents to the downstream agent versus a reduced cost for the upstream agent. Private observation of an interim signal is valuable to the principal if it is not too forward-looking. The choice between upstream and downstream agent depends non-trivially on the signal’s backward-looking quality. The results suggest that the value of observation and dissemination of an interim signal depends on the informativeness of output and the signal about upstream and downstream production