Wait-and-See or Step In? Dynamics of Interventions

Dana Foarta and Takuo Sugaya

American Economic Journal: Microeconomics, 2021, vol. 13, issue 1, 399-425

Abstract: We study the optimal intervention policy to stop projects in a relational contract between a principal and a policymaker. The policymaker is privately informed about his ability and privately chooses how much effort to exert. Before a project is completed, the principal receives a signal about its outcome and can intervene to stop it. Intervention may prevent a bad outcome, but no intervention leads to better learning about the policymaker's ability. In the benchmarks with observable effort or observable ability, optimal intervention follows a threshold rule. With unobservable effort and ability, the optimal policy switches between intervention and no intervention.

JEL-codes: D78 D82 D86 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (1)

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Working Paper: Wait-and-See or Step in? Dynamics of Interventions (2018)
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DOI: 10.1257/mic.20180321

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