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Optimal Monitoring in Teams

Author

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  • Gautier, Axel

    (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))

Abstract

This paper investigates the role of output quality control in a multi agent setting with moral hazard. The principal is in charge of a team of agents who produce the output. The marketing of this output can be either a success or entail huge losses. At the time of marketing the product, the principal is uncertain about its quality and can only observe an imperfect signal of it. This creates an ex post inefficiency (a successful project may not be undertaken) and a room for monitoring output's quality. In the paper, we describe when the principal will pay for this costly monitoring and its effect on agents' incentives to exert effort. We show that there are distortions ex ante in the contract offered by the principal and ex post in the continuation decision. The monitoring can only ensure ex post efficiency. The ex ante efficiency requires effort observability.

Suggested Citation

  • Gautier, Axel, 1999. "Optimal Monitoring in Teams," LIDAM Discussion Papers IRES 1999006, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
    • Handle: RePEc:ctl:louvir:1999006
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    File URL: http://sites.uclouvain.be/econ/DP/IRES/9906.pdf
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    References listed on IDEAS

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    1. Alchian, Armen A & Demsetz, Harold, 1972. "Production , Information Costs, and Economic Organization," American Economic Review, American Economic Association, vol. 62(5), pages 777-795, December.
    2. McAfee, R Preston & McMillan, John, 1991. "Optimal Contracts for Teams," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 32(3), pages 561-577, August.
    3. Grossman, Sanford J & Hart, Oliver D, 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 691-719, August.
    4. Holmstrom, Bengt R. & Tirole, Jean, 1989. "The theory of the firm," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 1, chapter 2, pages 61-133, Elsevier.
    5. Jacques Crémer, 1995. "Arm's Length Relationships," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 110(2), pages 275-295.
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    Cited by:

    1. Meijerink, Gerdien W., 2007. "If services aren't delivered, people won't pay: the role of measurement problems and monitoring in Payments for Environmental Services," 106th Seminar, October 25-27, 2007, Montpellier, France 7948, European Association of Agricultural Economists.

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    More about this item

    Keywords

    Team; principal agent; monitoring;
    All these keywords.

    JEL classification:

    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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