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|
|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.