Monitoring in Multiagent Organizations

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."