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Harmful monitoring

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Author Info

  • Haan, Marco A.
  • Los, Bart
  • Riyanto, Yohanes E.

    (Groningen University)

Abstract

Abstract We show that there may be circumstances in which a principal prefers not to observe the project choice of an agent that acts on her behalf. The ability of the agent is private information. Projects differ with respect to the amount of risk. If the principal can observe the project choice of the agent, the latter will use that choice as a signal. In the separating equilibrium, an agent with high ability then chooses a project that is too risky. If more difficult projects require more effort, there are two opposite effects. The shirking effect implies that the agent chooses a project that is too safe. The signaling effect implies that he chooses a project that is too risky. The net effect is ambiguous. We also discuss the implications of our model for promotion policies.

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File URL: http://irs.ub.rug.nl/ppn/301931496
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Bibliographic Info

Paper provided by University of Groningen, Research Institute SOM (Systems, Organisations and Management) in its series Research Report with number 07003.

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Date of creation: 2007
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Handle: RePEc:dgr:rugsom:07003

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References

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  1. Prat, Andrea, 2003. "The Wrong Kind of Transparency," CEPR Discussion Papers 3859, C.E.P.R. Discussion Papers.
  2. Dewatripont, Mathias & Jewitt, Ian & Tirole, Jean, 1999. "The Economics of Career Concerns, Part I: Comparing Information Structures," Review of Economic Studies, Wiley Blackwell, vol. 66(1), pages 183-98, January.
  3. Robert Gibbons & Kevin J. Murphy, 1992. "Optimal Incentive Contracts in the Presence of Career Concerns: Theory and Evidence," NBER Working Papers 3792, National Bureau of Economic Research, Inc.
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Cited by:
  1. Marco Haan & Bart Los & Yohanes Riyanto, 2011. "Signaling strength? An analysis of decision making in The Weakest Link," Theory and Decision, Springer, vol. 71(4), pages 519-537, October.

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