Monitoring Rent-Seeking Managers: Advantages of Diffuse Ownership

Roger Congleton

Canadian Journal of Economics, 1989, vol. 22, issue 3, 662-72

Abstract: This paper demonstrates that a one-owner firm tends to overmonitor its employees. Because monitoring is imperfect, and penalities imposable on detected rent-seekers are limited by the opportunity cost wage, employees have incentives to engage in rent-seeking activities that both reduce and redistribute the firm's residual. Since owner monitoring will be partly motivated by concerns over the distribution of the firm's residual, a sole owner tends to monitor beyond the level that maximizes a firm's residual. Appropriately diffuse ownership can reduce monitoring effort to efficient levels by diluting incentives for monitoring activities.

Date: 1989
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