Abstract
AbstractWe study the optimal disclosure policy in a sender–receiver communication game where the receiver's morale, defined as his expected state of the world, affects his performance. The sender observes the state and chooses whether to disclose it to the receiver, who then decides whether to participate in a task. The receiver wins if his performance in the task meets a target. No disclosure is optimal if the receiver wins with average morale in each state. Otherwise, in the threshold disclosure equilibrium that Pareto‐dominates full disclosure, the receiver quits as the sender discloses the worst states and wins as the sender withholds the rest. The receiver wins in more states in the Pareto‐optimal equilibrium as the sender chooses a non‐monotonic disclosure policy. Our theory reveals a trade‐off between transparency and efficiency when morale affects performance. It has applications in a broad range of areas including military, family, education and business.
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