| Elisabetta Iossa, Brunel University Patrick Legros, Universite Libre de Bruxelles |
| Third Party Monitoring and Golden Parachutes |
| Session: C-8-11 Monday 14 August 2000 by Legros, Patrick |
| We analyze a setting where the principal must rely on a third party to collect information on the performance of his agent. We combine two moral hazard problems: to induce productive effort from the agent and to provide the third party with incentives for information gathering. We show that the optimal contract takes a simple form. For high outputs, the agent is replaced by the third party and leaves with a fixed compensation (golden parachute). For low outputs the third party stays out. The model has a wide range of applications and suggests a new role for the threat to outsource: the entrant is used as a means to generate information that is correlated with the performance of the agent. |