Catching the agent on the wrong foot: ex post choice of monitoring

In a principal-agent model with multiple performance measures, we show that the principal benefits by choosing ex post which variables will be monitor ed. If it is too costly for one type of agent to mimic all performance meas ures expected from another type, the principal can hope to catch the agent on the wrong foot if the agent tries to misrepresent his type. For cases of small asymmetry of information, the principal can implement the first best contract. For more serious asymmetries of information, the first best is n ot implementable. Then the low type may be required to overproduce, which i s in contrast to the traditional result of second best contracting. We also obtain a ranking of monitoring instruments according to the frequency of t heir use. (C) 2001 Elsevier Science BV All rights reserved.