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Monitoring and competing principals: A double-edged sword

Jen-Wen Chang

Journal of Economic Theory, 2020, vol. 189, issue C

Abstract: Do monitoring technologies increase a principal's profits if she has to compete with others for an agent? While monitoring improves the risk-incentive tradeoff, it also reduces the costs for a rivaling principal to offer a more attractive contract. We show in a two-action, two-outcome model that when the derivative of the agent's risk tolerance is smaller than one, equilibrium profits are lower when monitoring is available if there is some competition. When the derivative is larger than one, equilibrium profits are higher when monitoring is available. Conversely, the agent benefits from monitoring when the competition is intense but can be hurt when it is mild.

Keywords: Competition; Monitoring; Moral hazard; Prudence; Risk tolerance (search for similar items in EconPapers)
JEL-codes: D81 D82 D86 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1016/j.jet.2020.105101

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