Dynamic Contracts with Random Monitoring

Andrei Barbos

No 416, Working Papers from University of South Florida, Department of Economics

Abstract: In environments where a principal contracts with many agents who each execute numerous independent tasks, it is often infeasible to evaluate an agent'?s performance on all tasks. Incentives under moral hazard are instead provided by monitoring only a subset of randomly selected tasks. We characterize optimal dynamic contracts implemented with this type of random monitoring technology. We consider a stochastic environment where the agent?'s cost of effort varies over time, and analyze situations where this cost is public or private information. In an optimal contract, the terms the agent is promised when monitoring reveals compliance are as good as when no monitoring is performed, and for some cost types are better. These latter types receive a monitoring reward. We also elicit the dynamics of contract parameters over time. As time passes and the agent becomes richer, the monitoring reward decreases as the threat of forgoing the promised stream of future compensation provides sufficient incentives for compliance.

Keywords: Dynamic Contracts; Random Monitoring; Optimal Contracts; Moral Hazard (search for similar items in EconPapers)
JEL-codes: D82 D86 (search for similar items in EconPapers)
Pages: 50 pages
Date: 2016-06
New Economics Papers: this item is included in nep-cta, nep-hrm and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://www.usf.edu/arts-sciences/departments/econ ... amic_auditing105.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 File Not Found

Related works:
Journal Article: Dynamic contracts with random monitoring (2019)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:usf:wpaper:0416

Access Statistics for this paper

More papers in Working Papers from University of South Florida, Department of Economics Contact information at EDIRC.
Bibliographic data for series maintained by Diogo Baerlocher (baerlocher@usf.edu).