Credibility and Monitoring: Outsourcing as a Commitment Device

Benjamin Bental, Bruno Deffains and Dominique Demougin ()

Journal of Economics & Management Strategy, 2012, vol. 21, issue 1, 31-52

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.

Date: 2012
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https://doi.org/10.1111/j.1530-9134.2011.00327.x

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