We propose a model in which teammates promise to complete socially efficient tasks; each task is an activity that a single person must exert costly effort to complete properly, but can be “botched” effortlessly. Each team member has limited capacity to allocate between monitoring and productive tasks. Such resource constraints may arise from limited time, staffing, capital, attention, or, as in our main example, bounded memory. The possibility of completing each task properly is privately observed, and monitoring is imperfect. We find that an optimal contract in this setting is generally "forgiving," and that players optimally make "empty promises" that they don’t necessarily intend to fulfill. As uncertainty in production and monitoring increases (e.g., due to greater forgetfulness), players optimally make more empty promises and devote more of their resources to monitoring.
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Find related papers by JEL classification: C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games D03 - Microeconomics - - General - - - Behavioral Economics; Underlying Principles D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
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