Monitoring with Career Concerns
Abstract: We study monitoring and manipulation in a dynamic career concerns model. An agent manipulates for a private benefit and is punished when a monitor detects the manipulation. The monitor's detection ability is uncertain and requires investment to maintain. By manipulating, the agent experiments about the monitor's ability and this experimentation motive encourages manipulation. Absent detection, the belief about the monitor's ability decreases, which increases the agent's willingness to manipulate, but discourages the monitor from investing in her ability. In equilibrium, the monitor lets her ability decay, even though she could prevent manipulation forever. Surprisingly, the monitor's investment encourages manipulation. The relationship is generally inefficient and there are multiple equilibria in which the monitor over-invests. Term limits reduce manipulation by curbing the agent's experimentation motive and long-serving monitors start accepting bribes to hide detections. The optimal organizational design exploits externalities between multiple manipulating agents.
