Monitoring Multiple Agents: The Role of Hierarchies

This paper presents an analysis of principal/multiple-agent, problems when there are monitoring possibilities. A principal/owner of a firm has to decide whether or not to employ one or more supervisors who can observe noisy signals on the workers/agents actions. For both workers and supervisors there is a moral hazard problem. The model is simplified by restricting several variables to values 0 or 1. In this setting the optimal allocation of monitoring activities and determinants of the decision to hire a supervisor are discussed, and it is explored how multi-level monitoring-hierarchies are structured in such a firm.