Private Monitoring, Collusion and the Timing of Information

34 Pages Posted: 5 May 2011 Last revised: 14 Apr 2015

See all articles by Fahad Khalil

Fahad Khalil

University of Washington - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Jacques P. Lawarree

University of Washington - Department of Economics

Troy J. Scott

RTI International

Date Written: April 2015

Abstract

When a principal’s monitoring information is private (non-verifiable), the agent should be concerned that the principal could misrepresent the information to reduce the agent’s wage or collect a monetary penalty. Restoring credibility may lead to an extreme waste of resources - the so-called burning of money. A more realistic and efficient outcome is feasible when the private information arrives in time to rescale the agent’s effort. Rescaling is more effective than pure monetary penalties because effort has different values to different parties while money is equally valuable to all parties. Furthermore, when rescaling is feasible, private monitoring is more efficient than public monitoring subject to collusion because nonmonetary penalties are ineffective to deter collusion.

Keywords: Monitoring, Unverifiable signal, Private communication, Timing of information, Collusion

JEL Classification: D73, D82, D86, D720, D830, D860

Suggested Citation

Khalil, Fahad and Lawarree, Jacques P. and Scott, Troy J., Private Monitoring, Collusion and the Timing of Information (April 2015). CESifo Working Paper Series No. 4497. Available at SSRN: https://ssrn.com/abstract=1830630 or http://dx.doi.org/10.2139/ssrn.1830630

Fahad Khalil (Contact Author)

University of Washington - Department of Economics ( email )

Box 353330
Seattle, WA 98195-3330
United States

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Jacques P. Lawarree

University of Washington - Department of Economics ( email )

Box 353330
Seattle, WA 98195-3330
United States

Troy J. Scott

RTI International ( email )

PO Box 12194
Research Triangle Park, NC 27709
United States

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