Optimal transparency of monitoring capability

Teck Yong Tan

Journal of Economic Theory, 2023, vol. 209, issue C

Abstract: This paper studies information design in an inspection game. A principal first privately decides whether to acquire a costly monitoring capability that is needed to detect shirking by an agent; subsequently, the agent decides whether to work or shirk. I show that overall efficiency can be improved by providing the agent with a partially — instead of fully — informative signal about the principal's decision; however, the resulting equilibrium involves the agent shirking with a positive probability and all the efficiency gained is captured by the agent. Overall efficiency can be further improved by providing the principal with private information about the signal generating process; this additional feature also allows the principal to capture the efficiency gained. The analysis sheds light on the extent to which information control can be used to improve monitoring efficiency in such inspection games.

Keywords: Information design; Inspection game; Monitoring capability (search for similar items in EconPapers)
JEL-codes: D23 D82 D83 D86 M54 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:209:y:2023:i:c:s0022053123000169

DOI: 10.1016/j.jet.2023.105620

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