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Ranking Contingent Monitoring Systems

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Author Info

  • 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.

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File URL: http://dx.doi.org/10.1287/mnsc.1060.0693
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Bibliographic Info

Article provided by INFORMS in its journal Management Science.

Volume (Year): 53 (2007)
Issue (Month): 9 (September)
Pages: 1501-1509

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Handle: RePEc:inm:ormnsc:v:53:y:2007:i:9:p:1501-1509

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Related research

Keywords: principal-agent; moral hazard; value of information; conditional monitoring; optimal audits; downside risk aversion;

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Cited by:
  1. Marie-Cécile Fagart & Claude Fluet, 2007. "Liability Insurance under the Negligence Rule," Cahiers de recherche 0730, CIRPEE.
  2. 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.
  3. 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.

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