Communication Costs and Incentives to Acquire Soft and Hard Knowledge

We study a multiple tasking principal-agent model where the agent gathers soft and hard knowledge for operational purposes. Within this set-up, we model communication from the agent to the principal as the process of hardening and transmitting soft knowledge, in the spirit of Dewatripont and Tirole (2005), and we assume that soft information, once hardened, can be used by the principal as a measure of the agent contribution to production (e.g., for incentive purposes). The assumption that hard and soft knowledge are complements in the communication technology, which naturally reflects the non-depletable nature of hard knowledge, leads to the following results. Under full delegation of information gathering choices, the agent’s private incentives to gather hard information fall short of social incentives; therefore, in the second best, the principal imposes the agent to gather more hard information than he would freely do were his decision reflect market prices (e.g., under full delegation).