This website uses cookies.

By clicking the "Accept" button or continuing to browse our site, you agree to first-party and session-only cookies being stored on your device to enhance site navigation and analyze site performance and traffic. For more information on our use of cookies, please see our Privacy Policy.

  1. Home
  2. Journals
  3. American Economic Journal: Microeconomics
  4. February 2021
  5. Wait-and-See or Step In? Dynamics of Interventions

Wait-and-See or Step In? Dynamics of Interventions

  • Dana Foarta
  • Takuo Sugaya
American Economic Journal: Microeconomics
vol. 13, no. 1, February 2021
(pp. 399-425)
Download Full Text PDF

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.

Citation

Foarta, Dana, and Takuo Sugaya. 2021. "Wait-and-See or Step In? Dynamics of Interventions." American Economic Journal: Microeconomics, 13 (1): 399-425. DOI: 10.1257/mic.20180321

Additional Materials

JEL Classification

  • D78 Positive Analysis of Policy Formulation and Implementation
  • D82 Asymmetric and Private Information; Mechanism Design
  • D86 Economics of Contract: Theory
There are no comments for this article.
Login to Comment