
doi: 10.3982/te5183
handle: 10419/320254
A principal incentivizes an agent to maintain compliance and to truthfully announce any breaches of compliance. Compliance is imperfectly controlled by the agent's private effort choices, is partially persistent, and is verifiable by the principal only through costly inspections. We show that in principal‐optimal equilibria, the principal enforces maximum compliance using deterministic inspections. Periodic inspection cycles are suspended during periods of self‐reported noncompliance, during which the agent is fined. We show how commitment to random inspections would benefit the principal, and discuss possible ways for the principal to overcome her commitment problem.
C73, D83, relational contracts, ddc:330, Principal-agent models, dynamic enforcement, Contract theory (moral hazard, adverse selection), Relational contracts, persistence, costly inspections
C73, D83, relational contracts, ddc:330, Principal-agent models, dynamic enforcement, Contract theory (moral hazard, adverse selection), Relational contracts, persistence, costly inspections
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