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Private Monitoring, Collusion and the Timing of Information

  • Fahad Khalil
  • Jacques Lawarree
  • 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 University of Washington, Department of Economics in its series Working Papers with number UWEC-2011-08.

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Date of creation: Apr 2011
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Handle: RePEc:udb:wpaper:uwec-2011-08
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  1. Michihiro Kandori, 2001. "Introduction to Repeated Games with Private Monitoring," CIRJE F-Series CIRJE-F-114, CIRJE, Faculty of Economics, University of Tokyo.
  2. Roland Strausz, 2006. "Interim Information in Long-Term Contracts," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 15(4), pages 1041-1067, December.
  3. Michihiro Kandori & Hitoshi Matsushima, 1998. "Private Observation, Communication and Collusion," Econometrica, Econometric Society, vol. 66(3), pages 627-652, May.
  4. William Fuchs, 2005. "Contracting with Repeated Moral Hazard and Private Evaluations," Discussion Papers 04-012, Stanford Institute for Economic Policy Research.
  5. Antoine Faure-Grimaud & Jean-Jacques Laffont & David Martimort, 2003. "Collusion, Delegation and Supervision with Soft Information," Review of Economic Studies, Wiley Blackwell, vol. 70(2), pages 253-279, 04.
  6. Faure-Grimaud, Antoine & Martimort, David, 2003. " Regulatory Inertia," RAND Journal of Economics, The RAND Corporation, vol. 34(3), pages 413-37, Autumn.
  7. Bentley W. MacLeod, 2003. "Optimal Contracting with Subjective Evaluation," American Economic Review, American Economic Association, vol. 93(1), pages 216-240, March.
  8. 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.
  9. 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.
  10. David Rahman, 2012. "But Who Will Monitor the Monitor?," American Economic Review, American Economic Association, vol. 102(6), pages 2767-97, October.
  11. 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.
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