On the Interdependencies of Supporting, Monitoring, and Assessing Agents

This paper shows that an employer’s two roles of supporting employees as well as assessing their abilities and making appropriate replacement decisions are inextricably intertwined. Offering support in the form of advice, resources, time, or freedom not only helps the worker to succeed in his job but either impedes or facilitates the assessment of his ability. This interaction has broad implications for the principal’s optimal choices of support and monitoring, the sensitivity of turnover to performance, moral hazard concerns, optimal incentive contracting, agent rents, and firm value. I apply the model to study why corporate boards that are more capable advisors make CEO replacement decisions that are less sensitive to performance and "tolerate" larger CEO rents, why tech companies such as Google "pamper" their engineers with seemingly excessive support and loose monitoring, why junior faculty members are protected from high teaching loads and service, and why headquarters may distort capital budgets even when division managers have no private information about their investment opportunities. ∗I thank Judson Caskey, Paul Fischer, Prasart Jongjaroenkamol, Christian Laux, Paul Newman, Korok Ray, and seminar participants at the University of Pennsylvania (Wharton) for valuable comments and suggestions.