Monitoring in Multiagent Organizations

29 Pages Posted: 1 Aug 2002

See all articles by Tim Baldenius

Tim Baldenius

Columbia Buiness School

Nahum D. Melumad

Columbia Business School - Accounting, Business Law & Taxation

Amir Ziv

Columbia Business School

Date Written: May 2002

Abstract

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, it is shown 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 he is not monitored compared with the case where he is monitored. That is, the chance of being monitored serves as a "stick" rather than a "carrot."

Keywords: Principal-agent, organization design, monitoring, aggregation, randomization

JEL Classification: D82, L22, M41

Suggested Citation

Baldenius, Tim and Melumad, Nahum D. and Ziv, Amir, Monitoring in Multiagent Organizations (May 2002). Available at SSRN: https://ssrn.com/abstract=312642 or http://dx.doi.org/10.2139/ssrn.312642

Tim Baldenius

Columbia Buiness School ( email )

3022 Broadway
New York, NY 10027
United States

Nahum D. Melumad

Columbia Business School - Accounting, Business Law & Taxation ( email )

3022 Broadway
611 Uris
New York, NY 10027
United States
212-854-2475 (Phone)

Amir Ziv (Contact Author)

Columbia Business School ( email )

3022 Broadway, 704 Uris
New York, NY 10027 10027
United States
212 854-3485 (Phone)
212 253-4095 (Fax)

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