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Should the Timing of Inspections be Predictable?

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  • Ian Ball
  • Jan Knoepfle

Abstract

A principal hires an agent to work on a long-term project that culminates in a breakthrough or a breakdown. At each time, the agent privately chooses to work or shirk. Working increases the arrival rate of breakthroughs and decreases the arrival rate of breakdowns. To motivate the agent to work, the principal conducts costly inspections. She fires the agent if shirking is detected. We characterize the principal's optimal inspection policy. Periodic inspections are optimal if work primarily generates breakthroughs. Random inspections are optimal if work primarily prevents breakdowns. Crucially, the agent's actions determine his risk attitude over the timing of punishments.

Suggested Citation

  • Ian Ball & Jan Knoepfle, 2023. "Should the Timing of Inspections be Predictable?," Papers 2304.01385, arXiv.org, revised Jan 2024.
    • Handle: RePEc:arx:papers:2304.01385
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    File URL: http://arxiv.org/pdf/2304.01385
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    Cited by:

    1. Achim, Peter & Knoepfle, Jan, 0. "Relational enforcement," Theoretical Economics, Econometric Society.
    2. Alireza Fallah & Michael I. Jordan, 2023. "Contract Design With Safety Inspections," Papers 2311.02537, arXiv.org.

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