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A Theory of Supervision with Endogenous Transaction Costs

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  • Antoine Faure-Grimaud
  • Jean-Jacques Laffont
  • David Martimort

Abstract

We propose a theory of supervision with endogenous transaction costs. A principal delegates part of his authority to a supervisor who can acquire soft information about an agent's productivity. If the supervisor were risk-neutral, the principal would simply make the better informed supervisor residual claimant for the hierarchy's profit. Under risk-aversion, the optimal contract trades-off the supervisor's incentives to reveal his information with an insurance motive. This contract can be identified with the one obtained in a simple hard information model of hierarchical collusion with exogenous transaction costs. Now, transaction costs are endogenous and depend on the collusion stake, the accuracy of the supervisory technology and the supervisor's degree of risk-aversion. We then discuss various implications of the model for the design and management of organisations.

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File URL: http://sticerd.lse.ac.uk/dps/te/te356.pdf
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Bibliographic Info

Paper provided by Suntory and Toyota International Centres for Economics and Related Disciplines, LSE in its series STICERD - Theoretical Economics Paper Series with number 356.

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Date of creation: Jul 1998
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Handle: RePEc:cep:stitep:356

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Web page: http://sticerd.lse.ac.uk/_new/publications/default.asp

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Keywords: Supervision; soft information; collusion; endogenous transaction costs;

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References

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  1. Tirole, Jean, 1991. "Collusion and the Theory of Organizations," IDEI Working Papers 9, Institut d'Économie Industrielle (IDEI), Toulouse.
  2. Aghion, Philippe & Tirole, Jean, 1997. "Formal and Real Authority in Organizations," Scholarly Articles 4554125, Harvard University Department of Economics.
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  7. Sanford Grossman & Oliver Hart, . "An Analysis of the Principal-Agent Problem," Rodney L. White Center for Financial Research Working Papers 15-80, Wharton School Rodney L. White Center for Financial Research.
  8. McAfee, R Preston & McMillan, John, 1995. "Organizational Diseconomies of Scale," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 4(3), pages 399-426, Fall.
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  12. Jean-Jacques Laffont & David Martimort, 1997. "The Firm as a Multicontract Organization," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 6(2), pages 201-234, 06.
  13. Jean-Jacques Laffont & David Martimort, 2000. "Mechanism Design with Collusion and Correlation," Econometrica, Econometric Society, vol. 68(2), pages 309-342, March.
  14. Laffont, Jean-Jacques & Meleu, Methieu, 1997. " Reciprocal Supervision, Collusion and Organizational Design," Scandinavian Journal of Economics, Wiley Blackwell, vol. 99(4), pages 519-40, December.
  15. Itoh Hideshi, 1993. "Coalitions, Incentives, and Risk Sharing," Journal of Economic Theory, Elsevier, vol. 60(2), pages 410-427, August.
  16. Jean-Jacques Laffont & David Martimort, 1997. "Collusion under Asymmetric Information," Econometrica, Econometric Society, vol. 65(4), pages 875-912, July.
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  18. Calvo, Guillermo A & Wellisz, Stanislaw, 1979. "Hierarchy, Ability, and Income Distribution," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 991-1010, October.
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  20. Robert, Jacques, 1991. "Continuity in auction design," Journal of Economic Theory, Elsevier, vol. 55(1), pages 169-179, October.
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Citations

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Cited by:
  1. Celik, Gorkem, 2009. "Mechanism design with collusive supervision," Journal of Economic Theory, Elsevier, vol. 144(1), pages 69-95, January.
  2. Faure-Grimaud, Antoine & Laffont, Jean-Jacques & Martimort, David, 1999. "The endogenous transaction costs of delegated auditing," European Economic Review, Elsevier, vol. 43(4-6), pages 1039-1048, April.
  3. Scholz, Julia, 2008. "Auswirkungen vertikaler Kollusionsprobleme auf die vertragliche Ausgestaltung von Kreditverkäufen," Discussion Papers in Business Administration 4581, University of Munich, Munich School of Management.
  4. Jonathan Treussard, 2005. "Life-Cycle Consumption Plans and Portfolio Policies in a Heath-Jarrow-Morton Economy," Boston University - Department of Economics - Working Papers Series WP2005-033, Boston University - Department of Economics.
  5. Billy Jack, 2003. "Comparing the distortionary effects of alternative in-kind intergovernmental transfers," Working Papers gueconwpa~03-03-17, Georgetown University, Department of Economics.

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