2000 Volume 9 Issue 1 Pages 61-89
Strausz has shown that monitoring technology is an important factor in motivation. In this article I extend the Strausz model to examine relationships between incentive and monitoring technology in detail.
First, in order to examine how monitoring costs interact with the monitoring technology in motivating an agent, I relax the assumption that says that monitoring cost is invariable. By comparative static analysis, I show that when a principal improves the monitoring technology, he/she can improve their expected utility by reducing the frequency of monitoring. On the other hand, he/she can not necessarily reduce the frequency of monitoring by reducing the cost of monitoring.
Second, in order to investigate the significance of self-assessment in motivating the agent, I extend the monitoring procedure so as to include the self-assessment process. I show that even though the principal can not use ordinal monitoring procedures because of the immaturity of the monitoring technology, he/she may be able to motivate the agent by adding the self-assessment process to the monitoring procedure.
Third, in order to examine how the evaluation gap affects the incentive, I extend the model to allow the agent to underestimate or overestimate the level of the principal’s monitoring technology. I show that if (1) the monitoring technology is premature and (2) the monitoring cost is low and (3) the agent overestimates the principal’s monitoring technology, the principal may be able to enjoy an unexpected surplus.
