But who will monitor the monitor?

Consider a group of individuals in a strategic environment with moral hazard and adverse selection, and suppose that providing incentives for a given outcome requires a monitor to detect deviations. What about the monitor’s deviations? This paper proposes a contractual arrangement that makes the monitor responsible for the monitoring technology (but not the entire firm), and asserts that his deviations are effectively irrelevant. Hence, nobody needs to monitor the monitor. The contract successfully provides incentives even when the monitor’s observations are not only private, but costly, too. We also characterize exactly when such a contract can provide monitors with the right incentives to perform. In doing so, virtual enforcement is characterized. JEL Classification: D21, D23, D82.

• Type: Conference
• Year: 2009
• Where: SIGECOM
• Authors: David M. Rahman
• Keywords: Incentives, Information Management, Monitor’s Deviations, Monitor’s Observations, SIGECOM 2009