Wait-and-See or Step In? Dynamics of Interventions

We study the optimal intervention policy to stop projects in a relationalcontract between a principal and a policymaker. The policymaker is privatelyinformed about his ability and privately chooses how much effort to exert.Before a project is completed, the principal receives a signal about itsoutcome and can intervene to stop it. Intervention may prevent a badoutcome, but no intervention leads to better learning about thepolicymaker's ability. In the benchmarks with observable effort orobservable ability, optimal intervention follows a threshold rule. Withunobservable effort and ability, the optimal policy switches betweenintervention and no intervention.