Reputation with Endogenous Information

In this paper I study a dynamic game between a principal who has to take a de-cision every period and an informed agent whose preferences over the decision are his private information. The decision maker has access to a costly monitoring tech-nology that potentially allows her to learn whether the agent has revealed his infor-mation truthfully before taking a decision. I show that the principal’s incentives to actively monitor are reduced by reputational concerns of the agent. In particular, I show that in any Markov Perfect Equilibrium the principal monitors less and the agent lies more often when the principal has long-run motivations if she believes that the agent is bad with sufficiently high probability. The reason is that when the type of the agent is uncertain, the principal can free-ride on his reputational con-cern, but once she discovers his type, this benefit is lost.