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Credibility and Monitoring: Outsourcing as a Commitment Device
Author(s) -
Bental Benjamin,
Deffains Bruno,
Demougin Dominique
Publication year - 2012
Publication title -
journal of economics and management strategy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.672
H-Index - 68
eISSN - 1530-9134
pISSN - 1058-6407
DOI - 10.1111/j.1530-9134.2011.00327.x
Subject(s) - outsourcing , credibility , principal (computer security) , moral hazard , incentive , business , risk analysis (engineering) , contractible space , environmental economics , computer science , industrial organization , microeconomics , computer security , economics , marketing , mathematics , combinatorics , political science , law
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.