Project Management

Monitoring With Collective Memory: Forgiveness For Optimally Empty Promises

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Executive Summary

The authors study optimal contracting in a team setting with moral hazard, where teammates promise to complete socially efficient but costly tasks. Teammates must monitor each other to provide incentives, but each team member has limited capacity to allocate between monitoring and productive tasks. Players incur contractual punishments for unfulfilled promises that are discovered. They show that optimal contracts are generally "Forgiving" and players optimally make "Empty promises" that they don't necessarily intend to fulfill. As uncertainty in task completion increases, players optimally make more empty promises but fewer total promises.

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