SFB 303 Discussion Paper No. A - 532

Author: Lülfesmann, Christoph
Title: Partial Monitoring, Managerial Compensation,and the Internal Efficiency of the Firm
Abstract: The paper investigates an adverse selection model with monitoring of managerial effort. In contrast to the literature, we assume that the manager can be punshished only if his effort is below a certain level that is monitored by the principal. Surprisingly, the optimal labor contract may induce an equilibrium effort which is it lower than in the standard model without monitoring. This result holds for any discrete distribution of managerial types. Moreover, we show in the continuous type case that the optimal contracts for high-quality (low-quality) managers are purely output-dependent (effort-dependent).
Keywords: Monitoring, Productive Efficiency, Adverse Selection
JEL-Classification-Number: H57, L51
Creation-Date: July 1998 (revised)
URL: ../1998/a/bonnsfa532.pdf
Graph: ../1998/a/figure1.gif

SFB 303 Homepage

18.08.1998, Webmaster