This research will extend an important kind of economic theory to consider a real world problem. The vast majority of the work in contract theory has focused on the case where both employers and employees can directly observe employee output. In contrast this research examines the situation where the worker's output is privately observed by the employer. There are many environments where this assumption is a closer approximation to reality and therefore it is vital to understand the best kinds of contracts to use under these conditions. The research provides a comprehensive analysis of the optimal provision of incentives with private monitoring.
The results of this research generates a new perspective on an important class of economic problems called agency problems. Since agency problems are present in most subfields of economics, political economics and corporate finance, the research has substantial broader impact.
The research shows that many features we observe in labor markets, such as wage compression, involuntary unemployment, efficiency wages, review periods and tournaments, can be explained as part of the way employers provide strong incentives to their employees.
Lastly, important macroeconomic questions can be addressed by embedding this model in a general equilibrium job search model. Does the presence of employment relationships with private monitoring generate different responses of equilibrium wages and unemployment to vacancies ratios in response to aggregate shocks? Are there new roles for government policy in this environment?
