Wait-and-See or Step In? Dynamics of Interventions
- (pp. 399-425)
AbstractWe 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.
CitationFoarta, 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
- D78 Positive Analysis of Policy Formulation and Implementation
- D82 Asymmetric and Private Information; Mechanism Design
- D86 Economics of Contract: Theory
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