Contracting, Gatekeepers, and Unverifiable Performance

James Dearden () and Dorothy E. Klotz

RAND Journal of Economics, 2002, vol. 33, issue 4, 723-739

Abstract: A group of diverse principals who represent an institution contract with an agent for the production of a two-dimensional commodity. One dimension of the agent's production is verifiable, while the other is unverifiable. The principals can employ two strategic tools to motivate the agent---a minimum requirement on the verifiable dimension and a tough gatekeeper. A gatekeeper is a principal who is elected and granted authority to determine whether the full group considers the agent's production. A tough gatekeeper can be used to motivate production in the unverifiable dimension. We characterize conditions for which the principals use these two strategic tools, and we examine the economic consequences of partial verifiability.

Date: 2002
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