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Delegation of Monitoring in a Principal-Agent Relationship

  • Strausz, Roland

This paper studies a principal-agent relationship in which either the principal or a supervisor can monitor the agent's hidden action by the use of identical monitoring technologies. The author assumes that signals are private information and commitment to monitoring is not possible. He shows that delegation of monitoring is profitable. With delegation the principal can better regulate incentives (incentive effect) and commit to a broader range of wage structures (commitment effect). The author introduces collusion to find an endogenous bound on rewards and shows that collusion limits the commitment effect but, due to the incentive effect, delegation remains profitable. Copyright 1997 by The Review of Economic Studies Limited.

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Article provided by Wiley Blackwell in its journal Review of Economic Studies.

Volume (Year): 64 (1997)
Issue (Month): 3 (July)
Pages: 337-57

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Handle: RePEc:bla:restud:v:64:y:1997:i:3:p:337-57
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  1. 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.
  2. 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.
  3. Kofman, F. & Lawarree, J., 1990. "Collusion in Hierarchical Agency," Working Papers 91-01, University of Washington, Department of Economics.
  4. Mookherjee, Dilip & Png, Ivan, 1989. "Optimal Auditing, Insurance, and Redistribution," The Quarterly Journal of Economics, MIT Press, vol. 104(2), pages 399-415, May.
  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.
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