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Credibility and Monitoring: Outsourcing as a Commitment Device

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  • Benjamin Bental
  • Bruno Deffains
  • Dominique Demougin

Abstract

We analyze an environment plagued by double moral hazard where the agent’s effort level and the principal’s precision in monitoring are not contractible. In such an environment, the principal tends to over‐monitor thereby inducing low effort. To ease the latter problem, the principal may choose to increase monitoring costs by outsourcing the activity. As a result equilibrium monitoring is reduced and incentives become more powerful. This choice is particularly likely when the worker’s effort is an important factor in determining output.

Suggested Citation

  • Benjamin Bental & Bruno Deffains & Dominique Demougin, 2012. "Credibility and Monitoring: Outsourcing as a Commitment Device," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 21(1), pages 31-52, March.
    • Handle: RePEc:bla:jemstr:v:21:y:2012:i:1:p:31-52
    DOI: j.1530-9134.2011.00327.x
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    References listed on IDEAS

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    Cited by:

    1. Verena Nowak & Christian Schwarz & Jens Suedekum, 2012. "On the Organizational Structure of Multinational Firms - Which Sourcing Mode for which Input?," CESifo Working Paper Series 3823, CESifo.
    2. Benjamin Bental & Bruno Deffains & Dominique Demougin, 2020. "Interpreting contracts: the purposive approach and non-comprehensive incentive contracts," European Journal of Law and Economics, Springer, vol. 50(2), pages 241-265, October.

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