MONITORING AGENTS WITH OTHER AGENTS

The principal-agent literature typically assumes that principals are unable to observe the characteristics or the actions of the agents whom they monitor. The inability of the principal to observe characteristics or actions leads to complications in the design of incentive schemes. For surveys of this literature, see Hart and Holmstrom [1987] and Rees [1985 a], [1985 b]. However, in reality, it is often not the case that agents' characteristics or effort levels are really unobservable; rather, they simply may be very costly to observe. One may choose to model high-costs actions as being infeasible actions, but in doing so, one may miss some interesting phenomena. In particular, simply because information is costly to the principal doesn't mean that it is costly to everyone. It may happen that the agents themselves are in good positions to monitor or advise each other.

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