Dynamic Contracting with Flexible Monitoring

2023-10-18 16:43:20

We study a principal's joint design of optimal monitoring and compensation schemes to incentivize an agent by incorporating information design into a dynamic contracting framework. The principal can fexibly allocate her limited monitoring capacity between seeking evidence that confirms or contradicts the agent's effort, as the basis for reward or punishment. When the agent's continuation value is low, the principal seeks only confirmatory evidence. When it exceeds a threshold, the principal seeks mainly contradictory evidence. Importantly, the agent's effort is perpetuated if and only if he is sufficiently productive.

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