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Monitoring and competing principals: A double-edged sword

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  • Chang, Jen-Wen

Abstract

Do monitoring technologies increase a principal's profits if she has to compete with others for an agent? While monitoring improves the risk-incentive tradeoff, it also reduces the costs for a rivaling principal to offer a more attractive contract. We show in a two-action, two-outcome model that when the derivative of the agent's risk tolerance is smaller than one, equilibrium profits are lower when monitoring is available if there is some competition. When the derivative is larger than one, equilibrium profits are higher when monitoring is available. Conversely, the agent benefits from monitoring when the competition is intense but can be hurt when it is mild.

Suggested Citation

  • Chang, Jen-Wen, 2020. "Monitoring and competing principals: A double-edged sword," Journal of Economic Theory, Elsevier, vol. 189(C).
    • Handle: RePEc:eee:jetheo:v:189:y:2020:i:c:s0022053120300946
    DOI: 10.1016/j.jet.2020.105101
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    References listed on IDEAS

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    More about this item

    Keywords

    Competition; Monitoring; Moral hazard; Prudence; Risk tolerance;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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