Optimally Empty Promises and Endogenous Supervision

45 Pages Posted: 3 Oct 2011 Last revised: 28 Jun 2012

See all articles by David A. Miller

David A. Miller

University of California, San Diego - Department of Economics

Kareen Rozen

Brown University - Department of Economics

Date Written: June 28, 2012

Abstract

We study optimal contracting in team settings, featuring stylized aspects of production environments with complex tasks. Agents have many opportunities to shirk, task-level monitoring is needed to provide useful incentives, and because it is difficult to write individual performance into formal contracts, incentives are provided informally, using wasteful sanctions like guilt and shame, or slowed promotion. These features give rise to optimal contracts with “empty promises” and endogenous supervision structures. Agents optimally make more promises than they intend to keep, leading to the concentration of supervisory responsibility in the hands of one or two agents.

Keywords: Partnership, Teams, Moral hazard, Monitoring, Supervision, Informal sanctions

JEL Classification: C72, D03, D86

Suggested Citation

Miller, David A. and Rozen, Kareen, Optimally Empty Promises and Endogenous Supervision (June 28, 2012). Cowles Foundation Discussion Paper No. 1823. Available at SSRN: https://ssrn.com/abstract=1937644 or http://dx.doi.org/10.2139/ssrn.1937644

David A. Miller

University of California, San Diego - Department of Economics ( email )

9500 Gilman Drive
La Jolla, CA 92093-0508
United States
858-822-0632 (Phone)

HOME PAGE: http://weber.ucsd.edu/~d9miller

Kareen Rozen (Contact Author)

Brown University - Department of Economics ( email )

64 Waterman Street
Providence, RI 02912
United States

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