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Monitoring in Multiagent Organizations *
Author(s) -
Baldenius Tim,
Melumad Nahum D.,
Ziv Amir
Publication year - 2002
Publication title -
contemporary accounting research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.769
H-Index - 99
eISSN - 1911-3846
pISSN - 0823-9150
DOI - 10.1506/0pjg-futb-kj5p-2fx0
Subject(s) - compensation (psychology) , principal (computer security) , signal (programming language) , perspective (graphical) , computer science , order (exchange) , operations research , artificial intelligence , business , computer security , engineering , psychology , finance , psychoanalysis , programming language
This paper studies how to assign “monitors” to productive agents in order to generate signals about the agents' performance that are most useful from a contracting perspective. We show that if signals generated by the same monitor are negatively (positively) correlated, then the optimal monitoring assignment will be “focused” (“dispersed”). This holds because dispersed monitoring allows the firm to better utilize relative performance evaluation. On the other hand, if each monitor communicates only an aggregated signal to the principal, then focused monitoring is always optimal since aggregation undermines relative performance evaluation. We also study team‐based compensation and randomized monitoring assignments. In particular, we show that the firm can gain from randomizing the monitoring assignment, compared with the optimal linear deterministic contract. Furthermore, under randomization, the conditional expected utility for the agent is higher when the agent is not monitored compared with the case where the agent is monitored. That is, the chance of being monitored serves as a “stick” rather than a “carrot”.