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Ranking Contingent Monitoring Systems

  • 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)

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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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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  1. Keenan, Donald C & Snow, Arthur, 2002. "Greater Downside Risk Aversion," Journal of Risk and Uncertainty, Springer, vol. 24(3), pages 267-77, May.
  2. Miles S. Kimball, 1989. "Precautionary Saving in the Small and in the Large," NBER Working Papers 2848, National Bureau of Economic Research, Inc.
  3. Mathias Dewatripont & Ian Jewitt & Jean Tirole, 1999. "The economics of career concerns: part 1 :comparing information structures," ULB Institutional Repository 2013/9617, ULB -- Universite Libre de Bruxelles.
  4. Claude Fluet & Dominique Demougin, 2001. "Ranking of information systems in agency models: an integral condition," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 17(2), pages 489-496.
  5. L. Eeckhoudt & H. Schlesinger, 2006. "Putting risk in its proper place," Post-Print hal-00283170, HAL.
  6. Ronald A. Dye, 1986. "Optimal Monitoring Policies in Agencies," RAND Journal of Economics, The RAND Corporation, vol. 17(3), pages 339-350, Autumn.
  7. Madhav V. Rajan & Bharat Sarath, 1997. "The Value of Correlated Signals in Agencies," RAND Journal of Economics, The RAND Corporation, vol. 28(1), pages 150-167, Spring.
  8. Menezes, C & Geiss, C & Tressler, J, 1980. "Increasing Downside Risk," American Economic Review, American Economic Association, vol. 70(5), pages 921-32, December.
  9. Son Ku Kim & Yoon S. Suh, 1992. "Conditional Monitoring Policy Under Moral Hazard," Management Science, INFORMS, vol. 38(8), pages 1106-1120, August.
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