Self-selection and Monitoring in Dynamic Incentive Problems with Incomplete Contracts
A dynamic trading problem is examined in which a monopsonistic employer hires workers with private information. The employer chooses between two mutually exclusive outcomes. In the mar ket outcome, the employer offers long-term contracts and information is conveyed entirely through self-selection and delayed production. In the monitoring outcome, the employer offers short-term contracts and contract renegotiation is conditioned by an employee's past performance. A simple characterization theorem is provided that illustrates surprising effects of improvements in information. For example, an employer who is initially offering short-term contracts may stop monitoring and shift to market screening when the monitoring technology becomes more informative. Copyright 1993 by The Review of Economic Studies Limited.
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Volume (Year): 60 (1993)
Issue (Month): 1 (January)
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