Abstract
AbstractPolitical leaders face many agency problems, such as managing subordinates who may not honestly report information. One potential solution to these problems is kompromat: the threat to release compromising information. Using a cheap talk model, we demonstrate how kompromat can improve communication, making both principal and agent better off. However, using kompromat to solve an agency problem generates two costs. First, its mere existence means it may leak inadvertently. Second, because kompromat works by threatening the reputation of subordinates, common knowledge that an organization uses kompromat might be costly even if it is never leaked. These possibilities may foreclose all communication from a subordinate who would have provided truthful information in the absence of kompromat.
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