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Signalling with Private Monitoring

Author

Listed:
  • Gonzalo Cisternas
  • Aaron Kolb

Abstract

We study dynamic signalling when the sender does not see the signals that her actions generate. The sender then uses her past play to forecast what a receiver believes, in turn forcing the receiver to forecast the previous forecast, and so forth. We identify a class of linear-quadratic-Gaussian games where this endogenous higher-order uncertainty can be handled. The sender’s second-order belief is key: it is a private state that she controls, and it creates a new channel for information transmission. We examine the role of higher-order uncertainty and this new signalling channel in applications to macroeconomics, reputation, and trading: inflationary biases under discretion can be larger; career-concerned agents may benefit from not knowing their reputations; and informed trades can carry more price impact. We also introduce an existence method for boundary value problems that can be used in other dynamic games.

Suggested Citation

  • Gonzalo Cisternas & Aaron Kolb, 2025. "Signalling with Private Monitoring," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 92(2), pages 909-953.
    • Handle: RePEc:oup:restud:v:92:y:2025:i:2:p:909-953.
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    File URL: http://hdl.handle.net/10.1093/restud/rdae035
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