This paper investigates the agency problem with moral hazard, where the principal hires multiple agents, and can only imperfectly monitor their action choices by observing their correlated public signals. The principal will penalize any detected deviant only by firing her and other agents. The key assumption of the paper is that agents are divided into multiple distinct groups. Within each group, all its members can make the binding commitments to achieve their collusive action choices. It is shown that it may be easier to provide the agents with the incentive to make the most desired action choices when multiple groups are established than when either no group or only the grand group is established. It is also shown that in terms of uniqueness, relative performance evaluation through inter-group competition will work better than that through inter-individual competition.
|Date of creation:||Mar 2003|
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