This paper studies a principal-agent relationship in which either the principal or a supervisor can monitor the agent's hidden action by the use of identical monitoring technologies. We assume that signals are private information and commitment to monitoring is not possible. We show that delegation of monitoring is profitable. With delegation the principal can better regulate incentives (incentive-effect) and commit to a broader range of wage structures (commitment-effect). We introduce collusion to find an endogenous bound on rewards and show that collusion limits the commitment-effect, but due to the incentive-effect delegation remains profitable.

In markets with quality unobservable to buyers, third-party certification is often the only instrument to increase transparency. While both sellers and buyers have a demand for certification, its role differs fundamentally: sellers use it for signalling, buyers use it for inspection. Seller-induced certification leads to more transparency, because it is informative—even if unused. By contrast, buyer-induced certification incentivizes certifiers to limit transparency, as this raises demand for inspection. Whenever transparency is socially beneficial, seller certification is preferable. It also yields certifiers larger profits, so that regulating the mode of certification is redundant.