Optimal contracts in a dynamic costly state verification model

Cyril Monnet () and Erwan Quintin ()

Economic Theory, 2005, vol. 26, issue 4, pages 867-885

Abstract: This paper describes optimal contracts in a dynamic costly state verification model with stochastic monitoring. An agent operates a risky project on behalf of a principal who can observe the project’s revenues at a cost. We show that an optimal contract exists such that, at any history, either the principal claims the project’s entire revenues or promises to claim nothing in the future. In particular, the agent’s expected income rises with time. Moreover, except in at most one period, the principal claims all revenues when audit occurs. We provide conditions under which all optimal contracts satisfy these properties. Copyright Springer-Verlag Berlin/Heidelberg 2005

Keywords: Dynamic contracts; Theory of uncertainty and information; Costly state verification; Monitoring. (search for similar items in EconPapers)
Date: 2005
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