The Role of Organizational Scope and Governance in Strengthening Private Monitoring

Forthcoming, Organization Science

59 Pages Posted: 16 Jul 2010 Last revised: 15 Oct 2012

Lamar Pierce

Washington University, Saint Louis - John M. Olin School of Business

Michael W. Toffel

Harvard Business School (HBS) - Technology & Operations Management Unit

Date Written: September 26, 2012

Abstract

Governments and other organizations often outsource activities to achieve cost savings from market competition. Yet such benefits are often accompanied by poor quality resulting from moral hazard, which can be particularly onerous when outsourcing the monitoring and enforcement of government regulation. In this paper, we argue that the considerable moral hazard associated with private regulatory monitoring can be mitigated by understanding conflicts of interest in the monitoring organizations’ product/service portfolios and by the effects of their private governance mechanisms. These organizational characteristics affect the stringency of monitoring through reputation, customer loyalty, differential impacts of government sanctions, and the standardization and internal monitoring of operations. We test our theory in the context of vehicle emissions testing in a state in which the government has outsourced these inspections to the private sector. Analyzing millions of emissions tests, we find empirical support for our hypotheses that particular product portfolios and forms of governance can mitigate moral hazard. Our results have broad implications for regulation, financial auditing, and private credit- and quality-rating agencies in financial markets.

Keywords: Organizational structure, scope, corruption, ethics, auditing, regulation, governance, environmental, pollution, automobile, outsourcing

Suggested Citation

Pierce, Lamar and Toffel, Michael W., The Role of Organizational Scope and Governance in Strengthening Private Monitoring (September 26, 2012). Forthcoming, Organization Science. Available at SSRN: https://ssrn.com/abstract=1640638 or http://dx.doi.org/10.2139/ssrn.1640638

Lamar Pierce

Washington University, Saint Louis - John M. Olin School of Business ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States
314-935-5205 (Phone)

Michael W. Toffel (Contact Author)

Harvard Business School (HBS) - Technology & Operations Management Unit ( email )

Boston, MA 02163
United States
617.384.8043 (Phone)

Paper statistics

Downloads
250
Rank
97,131
Abstract Views
1,207