Collusion, Delegation and Supervision with Soft Information

Abstract

This paper shows that supervision with soft information is valuable whenever supervisors and supervisees collude under asymmetric information and proceeds then to derive an Equivalence Principle between organizational forms of supervisory and productive activities. We consider an organization with an agent privately informed on his productivity and a risk averse supervisor getting signals on the agent's type. In a centralized organization, the principal can communicate and contract with both the supervisor and the agent. However, these two agents can collude against the principal. In a decentralized organization, the principal only communicates and contracts with the supervisor who in turn subcontracts with the agent. We show that the two organizations achieve the same outcome. We discuss this equivalence and provide various comparative statics results to assess the efficiency of supervisory structures.

Ex post unbalanced tournaments

“…The additional constraints at least weakly harm the principal compared to a situation without collusion. The work subsequent to Tirole () offers many variations of the collusion theme, including the possibility of multiple agents (Laffont, , ), multiple supervisors (Kofman and Lawarrée, ), and soft instead of hard information (Faure‐Grimaud, Laffont, and Martimort, ).…”

Bribery versus extortion: allowing the lesser of two evils

“…8 8 See also Faure‐Grimaud, Laffont, and Martimort (2003) for a model of soft information with asymmetric information between the supervisor and the agent. …”

Delegating performance evaluation

“…Laffont and Martimort (, ) argue convincingly that collusion is an issue in a standard mechanism design problem with hidden information. In addition to agents colluding among themselves, agents could also collude with the supervisor, as in Faure‐Grimaud et al (). Interestingly, both Laffont and Martimort () and Faure‐Grimaud et al () find that delegation to the supervisor can be a response to the possibility of collusion.…”

“…In addition to agents colluding among themselves, agents could also collude with the supervisor, as in Faure‐Grimaud et al (). Interestingly, both Laffont and Martimort () and Faure‐Grimaud et al () find that delegation to the supervisor can be a response to the possibility of collusion. An additional way to mitigate the danger of collusion, suggested by Laffont and Martimort (), is to introduce multiple supervisors.…”