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Monitoring in Multiagent Organizations

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  • Tim Baldenius
  • Nahum D. Melumad
  • Amir Ziv

Abstract

This paper studies how to assign “monitors†to productive agents in order to generate signals about the agents' performance that are most useful from a contracting perspective. We show that if signals generated by the same monitor are negatively (positively) correlated, then the optimal monitoring assignment will be “focused†(“dispersed†). This holds because dispersed monitoring allows the firm to better utilize relative performance evaluation. On the other hand, if each monitor communicates only an aggregated signal to the principal, then focused monitoring is always optimal since aggregation undermines relative performance evaluation. We also study team†based compensation and randomized monitoring assignments. In particular, we show that the firm can gain from randomizing the monitoring assignment, compared with the optimal linear deterministic contract. Furthermore, under randomization, the conditional expected utility for the agent is higher when the agent is not monitored compared with the case where the agent is monitored. That is, the chance of being monitored serves as a “stick†rather than a “carrot†.

Suggested Citation

  • Tim Baldenius & Nahum D. Melumad & Amir Ziv, 2002. "Monitoring in Multiagent Organizations," Contemporary Accounting Research, John Wiley & Sons, vol. 19(4), pages 483-511, December.
  • Handle: RePEc:wly:coacre:v:19:y:2002:i:4:p:483-511
    DOI: 10.1506/0PJG-FUTB-KJ5P-2FX0
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    Cited by:

    1. Frederick W. Rankin, 2004. "Coordinating Effort under Team†Based and Individual Incentives: An Experimental Analysis," Contemporary Accounting Research, John Wiley & Sons, vol. 21(1), pages 191-222, March.
    2. Oliver Dürr & Markus Nisch & Anna Rohlfing-Bastian, 2020. "Incentives in optimally sized teams for projects with uncertain returns," Review of Accounting Studies, Springer, vol. 25(1), pages 313-341, March.
    3. Madhav V. Rajan & Stefan Reichelstein, 2006. "Subjective Performance Indicators and Discretionary Bonus Pools," Journal of Accounting Research, Wiley Blackwell, vol. 44(3), pages 585-618, June.
    4. Gerald A. Feltham & Christian Hofmann, 2007. "Limited Commitment in Multi†agent Contracting," Contemporary Accounting Research, John Wiley & Sons, vol. 24(2), pages 345-375, June.
    5. Huddart, Steven & Liang, Pierre Jinghong, 2005. "Profit sharing and monitoring in partnerships," Journal of Accounting and Economics, Elsevier, vol. 40(1-3), pages 153-187, December.

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