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Wait-and-See or Step In? Dynamics of Interventions

Author

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  • Dana Foarta
  • Takuo Sugaya

Abstract

We study the optimal intervention policy to stop projects in a relational contract between a principal and a policymaker. The policymaker is privately informed about his ability and privately chooses how much effort to exert. Before a project is completed, the principal receives a signal about its outcome and can intervene to stop it. Intervention may prevent a bad outcome, but no intervention leads to better learning about the policymaker's ability. In the benchmarks with observable effort or observable ability, optimal intervention follows a threshold rule. With unobservable effort and ability, the optimal policy switches between intervention and no intervention.

Suggested Citation

  • Dana Foarta & Takuo Sugaya, 2021. "Wait-and-See or Step In? Dynamics of Interventions," American Economic Journal: Microeconomics, American Economic Association, vol. 13(1), pages 399-425, February.
    • Handle: RePEc:aea:aejmic:v:13:y:2021:i:1:p:399-425
    DOI: 10.1257/mic.20180321
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    Cited by:

    1. Foarta, Dana & Ting, Michael M., 2023. "Organizational capacity and project dynamics," Working Papers 339, The University of Chicago Booth School of Business, George J. Stigler Center for the Study of the Economy and the State.

    More about this item

    JEL classification:

    • D78 - Microeconomics - - Analysis of Collective Decision-Making - - - Positive Analysis of Policy Formulation and Implementation
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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