[This article describes a model in which an endogenous demand for cost reports exists, and characterizes optimal contracts. A principal employs an agent to implement investment projects. The agent's payments are subject to bankruptcy constraints; that is, the agent's wealth cannot fall below zero. To achieve the cost report perspective, the agent is assumed to acquire and communicate his/her private information after investment and production. The principal usefully incorporates the agent's cost reports within an optimal contract, in spite of two constraining features. First, the agent's information is only about historical costs, which are not informative about future investment opportunities. Second, at no time can the principal verify the agent's cost reports. However, as a substitute for cost verification in our model, the principal and agent can write long-term contracts. Although an unverifiable report is not useful in a one-period setting, in two periods it may become useful. We demonstrate necessary conditions for communication to be valuable in two periods. If single period contracts are used, the principal's residual claim is sometimes less than it would be in a full information setting. This loss occurs if and only if the bankruptcy constraints are binding in one period; that is, they prevent the principal from efficiently selling the firm to the risk-neutral agent. The principal's optimal reaction, given the tightness of the bankruptcy constraints, is either to underinvest or to permit the agent to keep any informational rents. Long-term contracts loosen the bankruptcy constraints because they permit the agent to accumulate wealth. We identify costs and benefits of communication-based two period contracts. Through long-term contracts, the principal makes a tradeoff: he commits to ex post inefficient investment decisions in order to reduce the cost of obtaining truthful reports from the agent. In some cases, production increases, leading to larger cash distributions to both parties. In other cases, production decreases, but the principal's residual increases because the agent's informational rents are reduced.]

Abstract Describes a model where an endogenous demand for cost reports exists, and characterizes optimal contracts. Achievement of cost report perspective; Necessary conditions for communication; Incorporation of cost reports within an optimal contract; Costs and benefits of communication-based two-period contracts.