Delegation of Monitoring in a Principal-Agent Relationship

Abstract

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. We assume that signals are private information and commitment to monitoring is not possible. We show 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). We introduce collusion to find an endogenous bound on rewards and show that collusion limits the commitment-effect, but due to the incentive-effect delegation remains profitable.

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