On equilibrium performance assurance with costly monitoring

This paper characterizes a class of repeated moral hazard problem where the agent's replacement action is necessary for assuring the performance of important materials and equipment. However, due to the principal's costly monitoring, the continuously decreasing performance caused by the agent's successive shirking behaviors will significantly harm the principal's profits or welfare. For sake of performance assurance and monitoring efficiency, this paper adopts two reinforcement learning algorithms to find and test the strategies on the final path satisfying the conditions of (Restricted) Experience Based Equilibrium. Experimental results in a case of quality assurance of grain demonstrate the effectiveness of the model and the solution methods. Practically, this framework especially fits a kind of government-enterprise relation, such as in the field of emergency materials management and safety production management. Given the increasing need of developing systems for the government's management, this paper aims to provide applicable strategies and guidelines from a theoretical perspective.