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Ranking Contingent Monitoring Systems

Author

Listed:
  • Marie-Cécile Fagart

    (LIRAES-Paris V and Université de Rouen, Rouen, France)

  • Bernard Sinclair-Desgagné

    (HEC Montréal, CIRANO, Montréal, Quebéc H3T 2A7, Canada and École Polytechnique, Paris, France)

Abstract

This paper seeks to provide a ranking of information systems in a setting of contingent monitoring. Control strategies that make the acquisition of additional information conditional on observing certain outcomes largely elude the existing ranking criteria. We show that this happens because contingent monitoring involves more than the classical trade-off between risk sharing and incentives; it also requires a balancing of incentives and downside risk. We then develop a refinement of the most common information system orderings that conveys this feature. This allows us to reinterpret and generalize some of the literature's key results concerning, for instance, auditing policies with independent or with correlated signals and monitoring systems where the precision of an added signal is endogenous.

Suggested Citation

  • Marie-Cécile Fagart & Bernard Sinclair-Desgagné, 2007. "Ranking Contingent Monitoring Systems," Management Science, INFORMS, vol. 53(9), pages 1501-1509, September.
    • Handle: RePEc:inm:ormnsc:v:53:y:2007:i:9:p:1501-1509
    DOI: 10.1287/mnsc.1060.0693
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Konrad, Kai A. & Lohse, Tim & Qari, Salmai, 2014. "Deception choice and self-selection – The importance of being earnest," Journal of Economic Behavior & Organization, Elsevier, vol. 107(PA), pages 25-39.
    2. Chaigneau, Pierre & Sahuguet, Nicolas & Sinclair-Desgagné, Bernard, 2017. "Prudence and the convexity of compensation contracts," Economics Letters, Elsevier, vol. 157(C), pages 14-16.
    3. Peter-J. Jost, 2023. "Auditing versus monitoring and the role of commitment," Review of Accounting Studies, Springer, vol. 28(2), pages 463-496, June.
    4. Keenan, Donald C. & Snow, Arthur, 2010. "Greater prudence and greater downside risk aversion," Journal of Economic Theory, Elsevier, vol. 145(5), pages 2018-2026, September.
    5. Marie‐Cécile Fagart & Claude Fluet, 2009. "Liability insurance under the negligence rule," RAND Journal of Economics, RAND Corporation, vol. 40(3), pages 486-508, September.
    6. Bernard Sinclair-Desgagné & Sandrine Spaeter, 2016. "Incentive Contracts and Downside Risk Sharing," Working Papers of BETA 2016-22, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
    7. Michel Denuit & Louis Eeckhoudt, 2016. "Risk aversion, prudence, and asset allocation: a review and some new developments," Theory and Decision, Springer, vol. 80(2), pages 227-243, February.
    8. Jung, Jin Yong & Kim, Son Ku, 2015. "Information space conditions for the first-order approach in agency problems," Journal of Economic Theory, Elsevier, vol. 160(C), pages 243-279.
    9. Keenan, Donald C. & Snow, Arthur, 2022. "Reversibly greater downside risk aversion by a prudence-based measure," Economics Letters, Elsevier, vol. 210(C).
    10. Michel Denuit & Louis Eeckhoudt & Béatrice Rey, 2010. "Some consequences of correlation aversion in decision science," Annals of Operations Research, Springer, vol. 176(1), pages 259-269, April.
    11. Alonso-Paulí, Eduard & André, Francisco J., 2015. "Standardized environmental management systems as an internal management tool," Resource and Energy Economics, Elsevier, vol. 40(C), pages 85-106.
    12. Au, Pak Hung & Chen, Bin R., 2019. "Objective and subjective indicators in long-term contracting," Journal of Economic Behavior & Organization, Elsevier, vol. 166(C), pages 309-331.
    13. Sebastian Ebert & Daniel Wiesen, 2011. "Testing for Prudence and Skewness Seeking," Management Science, INFORMS, vol. 57(7), pages 1334-1349, July.
    14. Denuit, Michel & Rey, Béatrice, 2010. "Prudence, temperance, edginess, and risk apportionment as decreasing sensitivity to detrimental changes," Mathematical Social Sciences, Elsevier, vol. 60(2), pages 137-143, September.
    15. Lohse, Tim & Konrad, Kai A. & Qari, Salmai, 2014. "Deception Choice and Audit Design - The Importance of Being Earnest," VfS Annual Conference 2014 (Hamburg): Evidence-based Economic Policy 100577, Verein für Socialpolitik / German Economic Association.

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