On monitoring timing in hierarchies

• Autores: Cont, Walter Alberto
• Año de publicación: 2001
• Idioma: inglés
• Tipo de recurso: documento de conferencia
• Materia: Ciencias Económicas
• Institución: Universidad Nacional de La Plata

The principal-agent literature has shown that the agent's incentive problems can be alleviated if the principal can hire either a supervisor or an auditor, but not much attention has been given to the choice between these two monitoring mechanisms. We analyze the optimal monitoring timing in a very simple setup with an honest monitor. This timing choice involves a trade-off. On one hand, a signal from a supervisor provides flexibility in contracting (since output can be contracted on this signal). On the other hand, a signal from an auditor can be used to punish the agent. We show that auditing is optimal when strong punishment schemes can be implemented and enforced by courts. If punishment is weak or cannot be enforced by courts, supervising (or, in general, ex ante monitoring) is optimal when the supervisor’s signal is informative of the agent’s type. The results are consistent with some stylized facts of organizational structures (auditing toplevel management and supervising low-level employees) and regulation of hazardous activities (in whose case a regulatory stage is more probable when the enforcement costs are lower).
Facultad de Ciencias Económicas