Price versus quantity monitoring

In an adverse selection context, this article explores the relative usefulness of price information over quantity information. The main finding is that price monitoring can induce a sales level that is greater than the full-information sales level. This imposes additional selling costs on the agent and reduces that agent's rents. The analysis identifies sufficient conditions for the principal to prefer price monitoring over quantity monitoring. Business-format franchises exhibit many of the features of the setting analyzed here, and the article's findings have implications for designing information systems in that sector of the economy. © 2006 by The University of Chicago. All rights reserved.