26 Pages Posted: 9 Feb 2020
Date Written: October 24, 2019
A micromanager "obsesses" over minor details. We consider a simple principal-agent
model where the agent produces output using primary and secondary effort, where secondary effort is less productive. We say the principal micromanages when she monitors secondary effort. We show that the principal never monitors primary effort: micromanagement is the only form of monitoring that can occur. An extreme form of micromanagement is when the principal implements high secondary effort even though its marginal product is less than its marginal cost to the agent. The reason is that micromanagement allows the principal to implement high primary effort without paying rent.
Keywords: incentives, micromanagement, monitoring, moral hazard, rent.
JEL Classification: D86
Suggested Citation: Suggested Citation