Theory has it, if a principal and an agent engage in a deal, the contract should spell out everything in details. And all actions should be verifiable. Non-verifiable actions are subject to asymmetric information and therefore prone to moral hazard problem. Read the 100-day program of SBY announced yesterday (sorry, cannot find internet link, read it in-print). Most of them are non-verifiable. Take macroeconomic program for example. It says 1) To secure the 2004 Budget; and 2) To review the 2005 Budget. You can verify the first one. But how would you verify a review effort? This is like having a contract with your professor (you being a research assistant), and you have "I will work hard" in the contract. How can that be verified? In other words, what is the criteria to judge your "working hard"?
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