Devasagayam, Prakasam R.

This research examines the impact of differential power on the choice of monitoring mode in interorganizational relationships in marketing channels. Interorganizational relationships in channels of distribution can be considered agency relationships because they involve delegation of value-adding tasks by one participant (principal) to another participant (agent). Moral Hazard or the likelihood of an agent pursuing individual goals at the expense of mutually satisfying common goals may result in suboptimal outcomes and necessitates monitoring by the principal. Monitoring involves procuring information on the effort expended by the agent (behavior-based monitoring) and the resultant outcomes of such efforts (outcome-based monitoring). A comparison of purely economic costs in determining preferred monitoring mode without considering sociopolitical factors, such as organizational power, that influence these costs may lead to an erroneous choice of monitoring mode. An organization's power is its ability to cope with uncertainty and depends on the resources available to the organization. As resources shift from one participant to another in an agency relationship, the differential power of participants changes. This research examines how the differential power of principal and agent influences their preference for different monitoring modes. Hypotheses linking differential power, moral hazard, and the choice of monitoring mode in interorganizational agency relationships are empirically investigated with data from not-for-profit nongovernment food distribution systems established to feed the hungry. Confirmatory factor analysis is used to analyze the data and estimate measurement and structural models. All the measurement scales were developed specifically for this study and display excellent psychometric properties. Results from structural models are generally consistent with the theoretical rationale. The results indicate that higher levels of principal's propensity to assume risk result in principal preferring an outcome-based monitoring mode. Higher level of principal's accrued information lead to an outcome-based monitoring mode being preferred by the principal. Higher level of agent's accrued information lead to the principal preferring a behavior-based monitoring mode and the agent preferring an outcome-based monitoring mode. Use of side payments as incentives to align the preferred monitoring modes of the participants finds support. The findings of this study have implications for managers and public policy officials in making strategic decisions regarding performance evaluation of downstream organizations in order to ensure optimal outcomes.