RETAIL CONTRACTING AND COSTLY MONITORING - THEORY AND EVIDENCE

We reconcile seemingly conflicting hypotheses and evidence that surfac e in the principal-agent literature. Specifically, we examine the lite rature that deals with the effect of costly monitoring on retail-organ izational form. Our principal-agent model of the optimal relationship between up and downstream firms allows the principal to garner two typ es of imperfect signals of agent effort: sales data and behavior data. The model yields predictions that we confront with the econometric ev idence, which comes from both franchising and sales-force-compensation literatures. We find that, when variation in the informativeness acid in the cost of increasing the informativeness of both signals is cons idered, the evidence is consistent with the theory.