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Delegation of Monitoring in a Principal-Agent Relationship

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  • Strausz, R.

    (Tilburg University, Center for Economic Research)

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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Bibliographic Info

Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 1995-60.

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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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  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.
  2. Mookherjee, Dilip & Png, Ivan, 1989. "Optimal Auditing, Insurance, and Redistribution," The Quarterly Journal of Economics, MIT Press, vol. 104(2), pages 399-415, May.
  3. Kofman, Fred & Lawarree, Jacques, 1993. "Collusion in Hierarchical Agency," Econometrica, Econometric Society, vol. 61(3), pages 629-56, May.
  4. 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.
  5. Border, Kim C & Sobel, Joel, 1987. "Samurai Accountant: A Theory of Auditing and Plunder," Review of Economic Studies, Wiley Blackwell, vol. 54(4), pages 525-40, October.
  6. Tirole, Jean, 1991. "Collusion and the Theory of Organizations," IDEI Working Papers 9, Institut d'Économie Industrielle (IDEI), Toulouse.
  7. Oliver Hart & Bengt Holmstrom, 1986. "The Theory of Contracts," Working papers 418, Massachusetts Institute of Technology (MIT), Department of Economics.
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