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Department ofEconomics

Papers

Obstructive Monitoring

Dongsoo Shin and Aaron Finkle

Journal of Economics & Management Strategy

 

Abstract:

We consider a principal-agent relationship in which the principal’s monitoring can be obstructive to the agent, reducing the agent’s productivity. We show that, with obstructive monitoring, the optimal output schedule is distorted in all directions— the high-cost agent produces less, and the low-cost agent produces more than the …rst-best levels. Moreover, if the principal has a choice, she will make monitoring deliberately obstructive, because when monitoring is obstructive, although the agent’s productivity decreases, his information rent is extracted more e¤ectively. We also show that obstruction is optimal even when the principal is unable to commit to her monitoring strategy ex ante.

 

LSB Research, ECON, Dongsoo Shin, Forthcoming,