Abstract
This paper addresses a problem involving a ‘principal’ and a potentially 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 rule which is applied will encourage truthful self-revelation. We identify a system of penalties which, taken together with a basis for determining the minimum necessary number of monitoring visits, efficiently encourages truthful revelation. We argue that such a rule has wide applicability.
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