COWLES FOUNDATION FOR RESEARCH IN ECONOMICS
AT YALE UNIVERSITY

Box 208281
New Haven, CT 06520-8281

COWLES FOUNDATION DISCUSSION PAPER NO. 1698

Monitoring with Collective Memory

David A. Miller and Kareen Rozen

June 2009
Revised October 2009

We propose a model in which teammates promise to complete socially efficient tasks; each task is an activity that a single person must exert costly effort to complete properly, but can be "botched" effortlessly. Each team member has limited capacity to allocate between monitoring and productive tasks. Such resource constraints may arise from limited time, staffing, capital, attention, or, as in our main example, bounded memory. The possibility of completing each task properly is privately observed, and monitoring is imperfect. We find that an optimal contract in this setting is generally "forgiving," and that players optimally make "empty promises" that they don’t necessarily intend to fulfill. As uncertainty in production and monitoring increases (e.g., due to greater forgetfulness), players optimally make more empty promises and devote more of their resources to monitoring.

Keywords: Bounded memory, Working memory, Team production, Costly monitoring, Moral hazard, Capacity constraints, Optimal contracts, Forgiveness, Empty promises, Collective memory, Crosscueing, Transactive responsibility

JEL Classification: C72, D03, D86