The Optimal Auditing Timing in the Repeated Principal Agent Model

Abstract:     
The main result of this paper is that, in continuous time games with imperfect monitoring it is better to average information over time rather than respond at every instant. The two main reasons why it is better to introduce delayed response to signals are that it helps to (1) loosen promise-keeping and incentive compatibility constraints and (2) to increase the power of statistical test to detect deviation. In games with symmetric equilibrium, the equilibrium strategies are trigger strategy. The simplicity of the trigger equilibrium allows us to get computational results for this case.

Number of Pages in PDF File: 41

Keywords: Repeated Games, Principal Agent, Continuous Time, Optimal Information Acquisition

JEL Classification: C73, C70, C61, D81, D83

working papers series