Monitoring and Collusion in Subjective Evaluations

Abstract

This study investigates the effect of hiring a monitor to observe an agent's behavior in situations where a principal can use subjective measures of his performance. We assume there is a possibility of collusion between the agent and the monitor, i.e., the agent can promise the monitor a monetary payment and get the monitor to make a false report. We derive the optimal contracts in the principal-agent model and the optimal collusion-proof contracts in the principal-monitor-agent model and compare them. The analysis shows that the optimal collusion-proof contracts with the monitor can reduce the agent's rent and burnt money that occur in the optimal contract without the monitor to zero. Furthermore, we also find that, under the optimal collusion-proof contracts, the amount paid to the monitor is never greater than the above payment reductions. Thus, hiring a monitor benefits the principal despite the possibility of collusion, which implies that monitors play vital roles in contracts with subjective evaluations.