Optimal Transparency of Monitoring Capability : A Panopticon from Information Design

This paper studies information disclosure of a principal's monitoring capability, with the goal to maximize its deterrence effect while minimizing the principal's need to acquire the costly capability. To keep the agent guessing about the principal's monitoring capability in equilibrium, the disclosure policy must incentivize the principal to randomize her acquisition decision. This requirement constrains how information can be hidden and revealed to “persuade” the agent against shirking. The sets of attainable payoffs are characterized for two broad classes of information devices and a transparency notion. The analysis sheds light on the different effects of information on the two players in an inspection game