DP4255 How Often Should you Open the Door? Optimal Monitoring to Screen Heterogeneous Agents

Author(s): Andrea Ichino, Gerd Muehlheusser
Publication Date: February 2004
Keyword(s): asymmetric information, effort, M50, monitoring, probation
JEL(s): D20, D80
Programme Areas: Labour Economics
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=4255

This Paper shows that over monitoring a partner in the initial phase of a relationship may not be optimal if the goal is to determine loyalty and if the cost of ending the relationship increases over time. This intuition is simple: by monitoring too much we lose the opportunity to learn how the partner will behave when not monitored. Only by allowing the partner the possibility to misbehave is there a chance to determine their characteristics at a time when separation would be possible at a relatively low cost.