RETRACTED: Garbling in the Principal’s Monitoring Device

I examine a principal-agent relation where the principal observes the actions of the agent with error. In order to motivate this situation, I imagine that the principal uses a device for monitoring the actions of an agent without his knowledge. The device potentially garbles, without prejudice, its binary-valued feedback to the principal. I show that as the number of possible errors that the device commits in its observation reduces, the maximum feasible outcome for the principal increases; as the number of observation instances increase, however, the agent’s set of feasible actions expands, and this reduces the maximum feasible outcome.