Leaks, Sabotage, and Information Design∗ Aaron Kolby Erik Madsenz February 2, 2019 Abstract We study optimal dynamic information disclosure by a principal to an agent of uncer- tain loyalty who may engage in hidden undermining, for instance through damaging leaks or sabotage. The agent requires information to correctly perform a task but may also covertly commit destructive acts which are only stochastically detectable. The principal optimally provides inconclusive incremental guidance until a deterministic time when the agent is deemed trusted and given a conclusive final report. Disloyal agents are never given incentives to feign loyalty, and in the unique time-consistent implementation undermine with variable, non-monotonic intensity over the lifetime of employment. JEL Classification: C70, D82, D83, D86, M51 Keywords: information leaks, sabotage, principal-agent model, information design 1 Introduction An organization has found itself the victim of information leaks and sabotage. Sensitive documents have been leaked to the media, corporate secrets have been sold to competitors, obscure vulnerable points in production lines have been discovered and sabotaged. An insider with access to privileged information must be undermining the organization | but who? Halting the distribution of sensitive data would staunch the bleeding, but also leave employees paralyzed and unable to act effectively. Limited information could be circulated ∗The authors thank Laurent Mathevet and seminar audiences at Brown University and the 2018 NSF/NBER/CEME Conference at the University of Chicago for helpful conversations. yDepartment of Business Economics and Public Policy, Kelley School of Business, Indiana University (Email:
[email protected]). zDepartment of Economics, New York University (Email:
[email protected]).