Dynamic Contracting with Flexible Monitoring

48 Pages Posted: 31 Dec 2019 Last revised: 1 Aug 2022

See all articles by Liang Dai

Liang Dai

The Chinese University of Hong Kong, Shenzhen (CUHK-Shenzhen)

Yenan Wang

Amsterdam Business School, University of Amsterdam

Ming Yang

UCL

Date Written: April 8, 2022

Abstract

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 flexibly 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.

Keywords: flexible monitoring, dynamic moral hazard

JEL Classification: D86, D82, G39, J33, M52

Suggested Citation

Dai, Liang and Wang, Yenan and Yang, Ming, Dynamic Contracting with Flexible Monitoring (April 8, 2022). Available at SSRN: https://ssrn.com/abstract=3496785 or http://dx.doi.org/10.2139/ssrn.3496785

Liang Dai

The Chinese University of Hong Kong, Shenzhen (CUHK-Shenzhen)

Yenan Wang

Amsterdam Business School, University of Amsterdam ( email )

Roetersstraat 18
Amsterdam, 1018 WB
Netherlands

Ming Yang (Contact Author)

UCL ( email )

Drayton House, 30 Gordon Street
30 Gordon Street
London, WC1H 0AX
United Kingdom

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