ENCOURAGING TRUTHFUL REVELATION WHEN MONITORING IS COSTLY

This paper addresses a problem involving a 'principal' and I potential ly large number of 'agents', in which the principal requires some rule which will ensure that agents are rewarded according to their effort. When the resources available make it impossible for the principal to monitor each agent's performance, it is desirable to ensure that any r ule which is applied will encourage truthful self-revelation. We ident ify a system of penalties which, taken together with a basis for deter mining the minimum necessary number of monitoring visits, efficiently encourages truthful revelation, We argue that such a rule has wide app licability.