Optimal dynamic procurement contracts with monitoring and lumpy investment

This paper studies optimal contracts and monitoring policies in procurement under dynamic adverse selection and moral hazard concerning a cost-reducing investment decision. I assume fixed costs of investment and show that the resulting 'lumpy' investment behavior creates a motive to monitor information that the supplier learns during the contractual relationship. The principal never monitors both the shock and the investment decision. Furthermore the principal is more likely to prefer to monitor the shock if the level of fixed cost of investment is high. Creation Date: 201502