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On the optimal use of loose monitoring in agencies

Publication ,  Journal Article
Chen, Q; Hemmer, T; Zhang, Y
Published in: Review of Accounting Studies
January 1, 2011

We study the governance implications of firms being privately informed of their potential productivity before contracting with an agent to supply unobservable effort. We show that it can be optimal for high potential firms to have "loose monitoring" in the sense that the monitoring system is less perfect than what is implied by a standard agency model a la Holmstrom (The Bell J Econ 10:74-91, 1979). Loose monitoring is used to achieve separation among different types of firms such that firms with low potential do not have incentives to imitate contracts offered by high potential firms. Our findings imply that although loose monitoring may be a symptom of firms squandering scarce resources provided by investors, it can also arise as an optimal contracting arrangement. © 2011 Springer Science+Business Media, LLC.

Duke Scholars

Published In

Review of Accounting Studies

DOI

ISSN

1380-6653

Publication Date

January 1, 2011

Volume

16

Issue

2

Start / End Page

328 / 354

Related Subject Headings

  • Accounting
  • 3501 Accounting, auditing and accountability
  • 1501 Accounting, Auditing and Accountability
 

Citation

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Chen, Q., Hemmer, T., & Zhang, Y. (2011). On the optimal use of loose monitoring in agencies. Review of Accounting Studies, 16(2), 328–354. https://doi.org/10.1007/s11142-011-9142-y
Chen, Q., T. Hemmer, and Y. Zhang. “On the optimal use of loose monitoring in agencies.” Review of Accounting Studies 16, no. 2 (January 1, 2011): 328–54. https://doi.org/10.1007/s11142-011-9142-y.
Chen Q, Hemmer T, Zhang Y. On the optimal use of loose monitoring in agencies. Review of Accounting Studies. 2011 Jan 1;16(2):328–54.
Chen, Q., et al. “On the optimal use of loose monitoring in agencies.” Review of Accounting Studies, vol. 16, no. 2, Jan. 2011, pp. 328–54. Scopus, doi:10.1007/s11142-011-9142-y.
Chen Q, Hemmer T, Zhang Y. On the optimal use of loose monitoring in agencies. Review of Accounting Studies. 2011 Jan 1;16(2):328–354.
Journal cover image

Published In

Review of Accounting Studies

DOI

ISSN

1380-6653

Publication Date

January 1, 2011

Volume

16

Issue

2

Start / End Page

328 / 354

Related Subject Headings

  • Accounting
  • 3501 Accounting, auditing and accountability
  • 1501 Accounting, Auditing and Accountability