Download This PaperWait-and-See or Step In? Dynamics of Interventions
American Economic Journal: Microeconomics, Forthcoming.
54 Pages Posted: 12 Sep 2018 Last revised: 17 Apr 2020
Date Written: August 27, 2019
Abstract
We study the optimal intervention policy to stop projects in a relational contract between a principal and a policymaker. The policymaker is privately informed about his ability and privately chooses how much effort to exert. Before a project is completed, the principal receives a signal about its outcome and can intervene to stop it. Intervention may prevent a bad outcome, but no intervention leads to better learning about the policymaker's ability. In the benchmarks with observable effort or observable ability, optimal intervention follows a threshold rule. With unobservable effort and ability, the optimal policy switches between intervention and no intervention.
Keywords: Interventions, Relational Contracts, Institutional Structures, Adverse Selection, Moral Hazard
JEL Classification: D78, D82, H77
Suggested Citation: Suggested Citation
