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Optimal transparency of monitoring capability

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  • Tan, Teck Yong

Abstract

This paper studies information design in an inspection game. A principal first privately decides whether to acquire a costly monitoring capability that is needed to detect shirking by an agent; subsequently, the agent decides whether to work or shirk. I show that overall efficiency can be improved by providing the agent with a partially — instead of fully — informative signal about the principal's decision; however, the resulting equilibrium involves the agent shirking with a positive probability and all the efficiency gained is captured by the agent. Overall efficiency can be further improved by providing the principal with private information about the signal generating process; this additional feature also allows the principal to capture the efficiency gained. The analysis sheds light on the extent to which information control can be used to improve monitoring efficiency in such inspection games.

Suggested Citation

  • Tan, Teck Yong, 2023. "Optimal transparency of monitoring capability," Journal of Economic Theory, Elsevier, vol. 209(C).
    • Handle: RePEc:eee:jetheo:v:209:y:2023:i:c:s0022053123000169
    DOI: 10.1016/j.jet.2023.105620
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    More about this item

    Keywords

    Information design; Inspection game; Monitoring capability;
    All these keywords.

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • M54 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Labor Management

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