 Optimal contracts with random monitoringInternational Journal of Game Theory, 2022, vol. 51, issue 1, No 5, 119-154 Abstract: Abstract We study an optimal contract problem under moral hazard in a principal-agent framework where contracts are implemented through random monitoring. This is a monitoring instrument that reveals the precise action taken by the agent with some nondegenerate probability, and otherwise reveals no information. The agent’s cost of performing the action depends on a random state of nature. This state is private information to the agent, but can be non-verifiably communicated, allowing the contract to specify wages as a function of the agent’s message. We show that the optimal contract partitions the set of types in three regions. The most efficient types exert effort and receive a reward when monitored. Moderately efficient types exert effort but are paid the same wage with monitoring as without. The least efficient types do not exert effort. More intense monitoring increases the value of a contract when the agent is risk averse. Keywords: Optimal contracts; Random monitoring; Moral hazard; Optimal control (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:spr:jogath:v:51:y:2022:i:1:d:10.1007_s00182-021-00787-9 Ordering information: This journal article can be ordered from DOI: 10.1007/s00182-021-00787-9 Access Statistics for this article International Journal of Game Theory is currently edited by Shmuel Zamir, Vijay Krishna and Bernhard von Stengel More articles in International Journal of Game Theory from Springer, Game Theory Society |
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