Working Paper: CEPR ID: DP4255
Authors: Andrea Ichino; Gerd Muehlheusser
Abstract: This Paper shows that over monitoring a partner in the initial phase of a relationship may not be optimal if the goal is to determine loyalty and if the cost of ending the relationship increases over time. This intuition is simple: by monitoring too much we lose the opportunity to learn how the partner will behave when not monitored. Only by allowing the partner the possibility to misbehave is there a chance to determine their characteristics at a time when separation would be possible at a relatively low cost.
Keywords: Asymmetric Information; Effort; Monitoring; Probation
JEL Codes: D20; D80; M50
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Excessive monitoring (H83) | Failure to distinguish between good and bad agents (D82) |
| Less frequent monitoring (C41) | Better identification of bad agents (D82) |
| Less frequent monitoring (C41) | Encouragement for bad agents to shirk (D82) |
| Encouragement for bad agents to shirk (D82) | Revealing their true type (C45) |
| Monitoring frequency (E52) | Agents' effort decisions (D79) |