Optimally Empty Promises and Endogenous Supervision

No 1823, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

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 (search for similar items in EconPapers)
JEL-codes: C72 D03 D86 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2011-10, Revised 2012-06
New Economics Papers: this item is included in nep-cta, nep-gth and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Working Paper: Optimally Empty Promises and Endogenous Supervision (2011)
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