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Private Monitoring, Collusion and the Timing of Information

  • Fahad Khalil
  • Jacques Lawarrée
  • Troy J. Scott

When a principal’s monitoring information is private (non-verifiable), the agent should be concerned that the principal could misrepresent the information to reduce the agent’s wage or collect a monetary penalty. Restoring credibility may lead to an extreme waste of resources—the so-called burning of money. A more realistic and efficient outcome is feasible when the private information arrives in time to rescale the agent’s effort. Rescaling is more effective than pure monetary penalties because effort has different values to different parties while money is equally valuable to all parties. Furthermore, when rescaling is feasible, private monitoring is more efficient than public monitoring subject to collusion because non-monetary penalties are ineffective to deter collusion.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 4497.

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Date of creation: 2013
Date of revision:
Handle: RePEc:ces:ceswps:_4497
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  1. William Fuchs, 2005. "Contracting with Repeated Moral Hazard and Private Evaluations," Game Theory and Information 0511007, EconWPA.
  2. Michihiro Kandori & Hitoshi Matsushima, 1998. "Private Observation, Communication and Collusion," Econometrica, Econometric Society, vol. 66(3), pages 627-652, May.
  3. Strausz, R.G., 1995. "Delegation of Monitoring in a Principal-Agent Relationship," Discussion Paper 1995-60, Tilburg University, Center for Economic Research.
  4. Celik, Gorkem, 2004. "Mechanism Design with Collusive Supervision," working papers celik-04-09-13-05-42-19, Vancouver School of Economics, revised 06 Aug 2008.
  5. Antoine Faure-Grimaud & Jean-Jacques Laffont & David Martimort, 2003. "Collusion, Delegation and Supervision with Soft Information," Review of Economic Studies, Oxford University Press, vol. 70(2), pages 253-279.
  6. Faure-Grimaud, Antoine & Martimort, David, 2003. " Regulatory Inertia," RAND Journal of Economics, The RAND Corporation, vol. 34(3), pages 413-37, Autumn.
  7. Roland Strausz, 2006. "Interim Information in Long-Term Contracts," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 15(4), pages 1041-1067, December.
  8. Michihiro Kandori, 2001. "Introduction to Repeated Games with Private Monitoring," CIRJE F-Series CIRJE-F-114, CIRJE, Faculty of Economics, University of Tokyo.
  9. Bentley MacLeod, 2001. "Optimal Contracting with Subjective Evaluation," Theory workshop papers 357966000000000036, UCLA Department of Economics.
  10. Fahad Khalil & Jacques Lawarrée & Sungho Yun, 2010. "Bribery versus extortion: allowing the lesser of two evils," RAND Journal of Economics, RAND Corporation, vol. 41(1), pages 179-198.
  11. 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.
  12. David Rahman, 2012. "But Who Will Monitor the Monitor?," American Economic Review, American Economic Association, vol. 102(6), pages 2767-97, October.
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