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Monitoring Gains and Decentralization

  • Bernd Theilen
Published/Copyright: September 28, 2009
The B.E. Journal of Theoretical Economics
From the journal The B.E. Journal of Theoretical Economics Volume 9 Issue 1

This paper analyzes the delegation of contracting capacity in a moral hazard environment with sequential production in a project which involves a principal and two agents. The agent in charge of the final production can obtain soft information about the other agent's effort choice by investing in monitoring. I investigate the circumstances under which it is optimal for the principal to use a centralized organization in which she designs the contracts with both agents or to use a decentralized organization in which she contracts with only one agent, and delegates the power to contract with the other agent. It is shown that in this setting a decentralized organization can be superior to a centralized organization. This is because the principal is better off under monitoring and the incentives for an agent to invest in monitoring can be higher in a decentralized organization. The circumstances under which this is true are related to monitoring costs and the importance of each agent for production. The results explain the recent application of the design-build method in public procurement.

Keywords: decentralization of contracting; monitoring; moral hazard
Published Online: 2009-9-28

©2011 Walter de Gruyter GmbH & Co. KG, Berlin/Boston

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  2. Private Information of Nonpaternalistic Altruism: Exaggeration and Reciprocation of Generosity
  3. Satisficing: A 'Pretty Good' Heuristic
  4. Optimal Auctions with Simultaneous and Costly Participation
  5. Temptations in General Settings
  6. Learning in Bayesian Games with Binary Actions
  7. Contracting in the Presence of Judicial Agency
  8. Updating Ambiguity Averse Preferences
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  12. Why (and When) are Preferences Convex? Threshold Effects and Uncertain Quality
  13. A Two-Step Subsidy Scheme to Overcome Network Externalities in a Dynamic Game
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  18. Advertising and Cost Reduction
  19. Directed Search, Rationing and Wage Dispersion
  20. Optimism and Bargaining Inefficiency
  21. Fair Depreciation: A Shapley Value Approach
  22. Product Variety, Scale Economies, and Environmental Taxes
  23. Market Competition and Lower Tier Incentives
  24. Vertical Differentiation, Social Networks and Compatibility Decisions
  25. Asymmetric Bertrand-Edgeworth Oligopoly and Mergers
  26. Consumer Rationing and the Cournot Outcome
  27. Representations and Identities for Homogeneous Technologies
  28. Monitoring Gains and Decentralization
  29. Cross-Cultural Trade and Institutional Stability
  30. Universal Service Obligations and Competition with Asymmetric Information
  31. A Duopoly Model of Political Agency with Applications to Anti-Corruption Reform
  32. Simple Economies with Multiple Equilibria
  33. A Note on Herbert Gintis' "Emergence of a Price System from Decentralized Bilateral Exchange"
  34. Contributions Article
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  40. The Efficiency of Observability and Mutual Linkage
  41. A Positive Theory of Income Taxation
  42. Supply Theory sans Profit Maximization
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  45. Income Distribution, Market Structure, and Individual Welfare
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  48. Sequential Auctions with Multi-Unit Demands
https://doi.org/10.2202/1935-1704.1525
Keywords for this article
decentralization of contracting; monitoring; moral hazard

Articles in the same Issue

  1. Advances Article
  2. Private Information of Nonpaternalistic Altruism: Exaggeration and Reciprocation of Generosity
  3. Satisficing: A 'Pretty Good' Heuristic
  4. Optimal Auctions with Simultaneous and Costly Participation
  5. Temptations in General Settings
  6. Learning in Bayesian Games with Binary Actions
  7. Contracting in the Presence of Judicial Agency
  8. Updating Ambiguity Averse Preferences
  9. Competition May Reduce the Revenue in a First Price Auction with Affiliated Private Values
  10. Topics Article
  11. Incentive Schemes in Peer-to-Peer Networks
  12. Why (and When) are Preferences Convex? Threshold Effects and Uncertain Quality
  13. A Two-Step Subsidy Scheme to Overcome Network Externalities in a Dynamic Game
  14. Oligopolistic Certification
  15. Envy-Free and Efficient Minimal Rights: Recursive No-Envy
  16. Risk Premiums versus Waiting-Options Premiums: A Simple Numerical Example
  17. Inflation, Self Insurance and the Friedman Rule in Economies with Uninsurable Idiosyncratic Risks
  18. Advertising and Cost Reduction
  19. Directed Search, Rationing and Wage Dispersion
  20. Optimism and Bargaining Inefficiency
  21. Fair Depreciation: A Shapley Value Approach
  22. Product Variety, Scale Economies, and Environmental Taxes
  23. Market Competition and Lower Tier Incentives
  24. Vertical Differentiation, Social Networks and Compatibility Decisions
  25. Asymmetric Bertrand-Edgeworth Oligopoly and Mergers
  26. Consumer Rationing and the Cournot Outcome
  27. Representations and Identities for Homogeneous Technologies
  28. Monitoring Gains and Decentralization
  29. Cross-Cultural Trade and Institutional Stability
  30. Universal Service Obligations and Competition with Asymmetric Information
  31. A Duopoly Model of Political Agency with Applications to Anti-Corruption Reform
  32. Simple Economies with Multiple Equilibria
  33. A Note on Herbert Gintis' "Emergence of a Price System from Decentralized Bilateral Exchange"
  34. Contributions Article
  35. Continuous Preferences and Discontinuous Choices: How Altruists Respond to Incentives
  36. Reputation, Career Concerns, and Job Assignments
  37. Fluctuations in Overlapping Generations Economies
  38. Principal and Expert Agent
  39. Sale of a Deteriorating Asset via Sequential Search
  40. The Efficiency of Observability and Mutual Linkage
  41. A Positive Theory of Income Taxation
  42. Supply Theory sans Profit Maximization
  43. The Dynamics of Collective Reputation
  44. Identifying Community Structures from Network Data via Maximum Likelihood Methods
  45. Income Distribution, Market Structure, and Individual Welfare
  46. Free Riding in Combinatorial First-Price Sealed-Bid Auctions
  47. Geometric Asymptotic Approximation of Value Functions
  48. Sequential Auctions with Multi-Unit Demands
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