Random Inspections and Periodic Reviews: Optimal Dynamic Monitoring

Andrzej Skrzypacz (Stanford graduate School of Business)

November 5, 2019, 11:00–12:30


Room MS001

Economic Theory Seminar


This paper studies the design of monitoring policies in dynamic settings with moral hazard. The firm benefits from having a reputation for quality, and the principal can learn the firm's quality by conducting costly inspections. Monitoring plays two roles: An incentive role, because the outcome of inspections affects the rm's reputation, and an informational role because the principal values the information about the firm's quality. We characterize the optimal monitoring policy inducing full effort. It can be implemented by dividing firms into two types of lists: recently inspected and not, with random inspections of firms in the latter.