Technically, this is, indeed, possible. The problem is that it is impossible to verify that the activities are actually being performed. It is not difficult to claim that activities are being carried out when they are not. To verify the claim, it is necessary to monitor(or audit) activity, and this violets the independent status of the third party.
Why not bypass auditing, instead placing one’s trust in the third party’s promise that it will execute the desired activities? This, too, is possible, and it is sometimes done. However, it is very difficult to know when a party can be trusted. Many a firm has come to regret having placed its trust in a third party. While trustworthy parties exist, it is exceedingly difficult to know who they are. It is also difficult. Though not impossible, to create incentive structure such that the agent has no desire to betray the principal’s trust-and the principal has no desire to take advantage of the agent’s promise, once given. The solution of mutual trust is covered in chapter 8.
Technically, this is, indeed, possible. The problem is that it is impossible to verify that the activities are actually being performed. It is not difficult to claim that activities are being carried out when they are not. To verify the claim, it is necessary to monitor(or audit) activity, and this violets the independent status of the third party.Why not bypass auditing, instead placing one’s trust in the third party’s promise that it will execute the desired activities? This, too, is possible, and it is sometimes done. However, it is very difficult to know when a party can be trusted. Many a firm has come to regret having placed its trust in a third party. While trustworthy parties exist, it is exceedingly difficult to know who they are. It is also difficult. Though not impossible, to create incentive structure such that the agent has no desire to betray the principal’s trust-and the principal has no desire to take advantage of the agent’s promise, once given. The solution of mutual trust is covered in chapter 8.
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