2008 Volume 1 Pages 81-83
We formulate a monitoring model of a situation where a principal (an inspector) verifies that an agent (an inspectee) adheres to a level of effort. We incorporate belief-dependent payoffs, guilt feelings and reciprocity, into the payoff of the agent. We examine the impact of incorporation of belief-dependent payoffs on the error probability that the principal conducts a costly investigation into a level of effort chosen by the agent although the agent chooses a desirable level of effort for the principal. It is known that theories equipped with these belief-dependent payoffs explain stylized facts of a wide range of experimental games. We find that, however, in our model each belief-dependent payoff has different impact on the error probability from each other. Moreover the belief-dependent guilt feelings reduce the error probability and for any error probability the agent with reciprocity has an incentive to choose undesirable level of effort for the principal.
