Monitoring Reduces Efficiency: Evidence from the Laboratory

34 Pages Posted: 11 Jul 2014

See all articles by Eberhard Feess

Eberhard Feess

Frankfurt School of Finance & Management

Markus Schramm

RWTH Aachen University

Date Written: July 11, 2014

Abstract

In a laboratory experiment, we investigate the delegation of real authority in the spirit of the seminal paper by Aghion and Tirole (1997). Agents need to spend effort to identify promising projects, and principals can invest in monitoring to overrule agents with some probability. Based on a simple model, we predict that, compared to the Subgame Perfect Equilibrium with payoff maximization, principals invest too much in monitoring, and that agents respond too strongly to higher monitoring. Both hypotheses are confirmed, and principals face high losses due to over-monitoring. As the behavioral preferences of principals and agents are reinforcing with respect to the losses from over-monitoring, we conclude that restricting the principals' right to interfere may often yield higher payoffs for both managers and their subordinates.

Keywords: Monitoring, delegation, control premium, laboratory experiment

JEL Classification: C91, D03, D22, D82, J30

Suggested Citation

Feess, Eberhard and Schramm, Markus, Monitoring Reduces Efficiency: Evidence from the Laboratory (July 11, 2014). Available at SSRN: https://ssrn.com/abstract=2464932 or http://dx.doi.org/10.2139/ssrn.2464932

Eberhard Feess (Contact Author)

Frankfurt School of Finance & Management ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

Markus Schramm

RWTH Aachen University ( email )

Templergraben 55
52056 Aachen, 52056
Germany

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