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Delegation of Monitoring in a Principal-Agent Relationship

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Author Info
Strausz, R. (Tilburg University, Center for Economic Research)

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Abstract

This paper studies a principal-agent relationship with moral hazard in which the principal or the supervisor can monitor the agent's hidden action by using identical monitoring technologies. The paper shows that delegation of monitoring to the supervisor is profitable because of two effects. With delegation the principal can better regulate the incentives (incentive effect) and can commit to wage structures to which she could not commit without delegation (commitment effect). As a logical step collusion is introduced and it is shown that even with the possibility of collusion delegation is an optimal strategy.

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Publisher Info
Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 60.

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Date of creation: 1995
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Handle: RePEc:dgr:kubcen:199560

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Web page: http://center.uvt.nl

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Related research
Keywords: Monitoring;

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Find related papers by JEL classification:
L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Laffont, Jean-Jacques & Tirole, Jean, 1991. "The Politics of Government Decision-Making: A Theory of Regulatory Capture," The Quarterly Journal of Economics, MIT Press, vol. 106(4), pages 1089-127, November. [Downloadable!] (restricted)
    Other versions:
  2. Tirole, Jean, 1986. "Hierarchies and Bureaucracies: On the Role of Collusion in Organizations," Journal of Law, Economics and Organization, Oxford University Press, vol. 2(2), pages 181-214, Fall.
  3. Border, Kim C & Sobel, Joel, 1987. "Samurai Accountant: A Theory of Auditing and Plunder," Review of Economic Studies, Blackwell Publishing, vol. 54(4), pages 525-40, October. [Downloadable!] (restricted)
  4. Tirole, Jean, 1991. "Collusion and the Theory of Organizations," IDEI Working Papers 9, Institut d'Économie Industrielle (IDEI), Toulouse.
  5. Oliver Hart & Bengt Holmstrom, 1986. "The Theory of Contracts," Working papers 418, Massachusetts Institute of Technology (MIT), Department of Economics.
  6. Kofman, Fred & Lawarree, Jacques, 1993. "Collusion in Hierarchical Agency," Econometrica, Econometric Society, vol. 61(3), pages 629-56, May. [Downloadable!] (restricted)
  7. Mookherjee, Dilip & Png, Ivan, 1989. "Optimal Auditing, Insurance, and Redistribution," The Quarterly Journal of Economics, MIT Press, vol. 104(2), pages 399-415, May. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Anna Maria Cristina Menichini, 2003. "Separation of functions, Collusion and Supervisors Financial Participation," CSEF Working Papers 109, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy. [Downloadable!]
  2. Marisa Ratto & Wendelin Schnedler, 2003. "Too few cooks spoil the broth," The Centre for Market and Public Organisation 03/090, Department of Economics, University of Bristol, UK. [Downloadable!]
    Other versions:
  3. Boot, Arnoud W A & Macey, Jonathon, 1999. "Objectivity, Proximity and Adaptability in Corporate Governance," CEPR Discussion Papers 2257, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  4. Marisa Ratto & Wendelin Schnedler, 2008. "Too Few Cooks Spoil the Broth: Division of Labour and Directed Production," Working Papers 0468, University of Heidelberg, Department of Economics, revised Jul 2008. [Downloadable!]
  5. Will, Heide C. U., 1998. "Management Style in Decision Making: Top Down or Bottom Up?," Discussion Paper Serie A 577, University of Bonn, Germany. [Downloadable!]
  6. Dequiedt, Vianney & Martimort, David, 2004. "Delegated Monitoring versus Arm's Length Contracting," IDEI Working Papers 265, Institut d'Économie Industrielle (IDEI), Toulouse. [Downloadable!]
    Other versions:
  7. Marisa Ratto & Wendelin Schnedler, 2005. "Division of Labour and Directed Production," The Centre for Market and Public Organisation 05/126, Department of Economics, University of Bristol, UK. [Downloadable!]
    Other versions:
  8. Albert Park & Minggao Shen, 2002. "A Refinancing Model of Decentralization with Empirical Evidence from China," William Davidson Institute Working Papers Series 461, William Davidson Institute at the University of Michigan Stephen M. Ross Business School. [Downloadable!]
  9. Roland Strausz, 2005. "Interim Information in Long Term Contracts," Discussion Papers 40, SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich. [Downloadable!]
    Other versions:
  10. Thomas Giebe & Oliver Gürtler, 2008. "Optimal Contracts for Lenient Supervisors," Discussion Papers 237, SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich. [Downloadable!]
  11. Roland Strausz, 2004. "Buried in Paperwork: Excessive Reporting in Organizations," Discussion Papers 27, SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich. [Downloadable!]
    Other versions:
  12. Annamaria Menichini & Peter Simmons, 2001. "Are two investors better than one?," CSEF Working Papers 71, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy. [Downloadable!]
  13. Arnoud W.A. Boot & Jonathan R. Macey, 1998. "Objectivity, Control and Adaptability in Corporate Governance," Tinbergen Institute Discussion Papers 98-064/2, Tinbergen Institute. [Downloadable!]
  14. Scholz, Julia, 2008. "Auswirkungen vertikaler Kollusionsprobleme auf die vertragliche Ausgestaltung von Kreditverkäufen," Discussion Papers in Business Administration 4581, University of Munich, Munich School of Management. [Downloadable!]
  15. Fahad Khalil & Jacques Lawarree, 2000. "CATCHING THE AGENT ON THE WRONG FOOT: ex post choice of monitoring," Discussion Papers in Economics at the University of Washington 0006, Department of Economics at the University of Washington. [Downloadable!]
  16. Annamaria Menichini, 2000. "Third parties as an incentive to comply," CSEF Working Papers 41, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 01 Jan 2006. [Downloadable!]
  17. Roland Strausz, . "Mitigating Non-contractible actions by randomness," Papers 003, Departmental Working Papers. [Downloadable!]
  18. Will, Heide C. U., 1998. "External vs Internal Monitors: The Role of Restructuring Consequences and Information Technologies," Discussion Paper Serie A 576, University of Bonn, Germany. [Downloadable!]
  19. A. Menichini & P. Simmons, . "Can Liars Ever Prosper," Discussion Papers 02/10, Department of Economics, University of York. [Downloadable!]
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