Collusion, delegation and supervision with soft information

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Publication Details

Output type: Journal article

Author list: Faure-Grimaud A, Laffont JJ, Martimort D

Publisher: Oxford University Press

Publication year: 2003

Journal: The Review of Economic Studies (0034-6527)

Volume number: 70

Issue number: 2

Start page: 253

End page: 279

Number of pages: 27

ISSN: 0034-6527

eISSN: 1467-937X

Languages: English-Great Britain (EN-GB)

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Open access status: green

Full text URL: http://idei.fr/sites/default/files/medias/doc/wp/2003/collusiondelegation.pdf

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 sub-contracts 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.

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