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A Theory of Supervision with Endogenous Transaction Costs

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Author Info
Faure-Grimaud, Antoine
Laffont, Jean-Jacques
Martimort, David

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Abstract

We propose a theory of supervision with endogenous transaction costs. A principle 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 hieracrchy'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 organizations.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 1967.

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Date of creation: Sep 1998
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Handle: RePEc:cpr:ceprdp:1967

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Related research
Keywords: Collusion; endogenous transaction costs; soft information; supervision;

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Find related papers by JEL classification:
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure
L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Jean-Jacques Laffont & David Martimort, 1999. "Separation of Regulators Against Collusive Behavior," RAND Journal of Economics, The RAND Corporation, vol. 30(2), pages 232-262, Summer. [Downloadable!] (restricted)
    Other versions:
  2. McAfee, R Preston & McMillan, John, 1995. "Organizational Diseconomies of Scale," Journal of Economics & Management Strategy, Blackwell Publishing, vol. 4(3), pages 399-426, Fall.
    Other versions:
  3. Itoh Hideshi, 1993. "Coalitions, Incentives, and Risk Sharing," Journal of Economic Theory, Elsevier, vol. 60(2), pages 410-427, August. [Downloadable!] (restricted)
  4. Laffont, Jean-Jacques & Meleu, Methieu, 1997. " Reciprocal Supervision, Collusion and Organizational Design," Scandinavian Journal of Economics, Blackwell Publishing, vol. 99(4), pages 519-40, December. [Downloadable!] (restricted)
  5. Aghion, Philippe & Tirole, Jean, 1997. "Formal and Real Authority in Organizations," Journal of Political Economy, University of Chicago Press, vol. 105(1), pages 1-29, February.
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  6. Tirole, Jean, 1986. "Hierarchies and Bureaucracies: On the Role of Collusion in Organizations," Journal of Law, Economics and Organization, Oxford University Press, vol. 2(2), pages 181-214, Fall.
  7. 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. [Downloadable!] (restricted)
  8. Ernst Fehr & Simon Gachter & Georg Kirchsteiger, 1997. "Reciprocity as a Contract Enforcement Device: Experimental Evidence," Econometrica, Econometric Society, vol. 65(4), pages 833-860, July.
  9. Galambos, Louis, 1995. "The Authority and Responsibility of the Chief Executive Officer: Shifting Patterns in Large US Enterprises in the Twentieth Century," Industrial and Corporate Change, Oxford University Press, vol. 4(1), pages 187-203.
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  11. Leonardo Felli, 1996. "Preventing Collusion Through Discretion," STICERD - Theoretical Economics Paper Series 303, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
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    Other versions:
  13. Jean-Jacques Laffont & David Martimort, 1998. "Collusion and Delegation," RAND Journal of Economics, The RAND Corporation, vol. 29(2), pages 280-305, Summer. [Downloadable!] (restricted)
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  14. Cremer, Jacques & McLean, Richard P, 1988. "Full Extraction of the Surplus in Bayesian and Dominant Strategy Auctions," Econometrica, Econometric Society, vol. 56(6), pages 1247-57, November. [Downloadable!] (restricted)
  15. Laffont, Jean-Jacques, 1990. "Analysis of Hidden Gaming in a Three-Level Hierarchy," Journal of Law, Economics and Organization, Oxford University Press, vol. 6(2), pages 301-24, Fall.
  16. Jean-Jacques Laffont & David Martimort, 1997. "The Firm as a Multicontract Organization," Journal of Economics & Management Strategy, Blackwell Publishing, vol. 6(2), pages 201-234, 06. [Downloadable!] (restricted)
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  17. Tirole, Jean, 1991. "Collusion and the Theory of Organizations," IDEI Working Papers 9, Institut d'Économie Industrielle (IDEI), Toulouse.
  18. Jean-Jacques Laffont & David Martimort, 1997. "Collusion under Asymmetric Information," Econometrica, Econometric Society, vol. 65(4), pages 875-912, July.
    Other versions:
  19. Grossman, Sanford J & Hart, Oliver D, 1983. "An Analysis of the Principal-Agent Problem," Econometrica, Econometric Society, vol. 51(1), pages 7-45, January. [Downloadable!] (restricted)
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  20. Prendergast, Canice & Topel, Robert H, 1996. "Favoritism in Organizations," Journal of Political Economy, University of Chicago Press, vol. 104(5), pages 958-78, October. [Downloadable!] (restricted)
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  21. Kofman, Fred & Lawarree, Jacques, 1993. "Collusion in Hierarchical Agency," Econometrica, Econometric Society, vol. 61(3), pages 629-56, May. [Downloadable!] (restricted)
  22. Nahum D. Melumad & Dilip Mookherjee & Stefan Reichelstein, 1995. "Hierarchical Decentralization of Incentive Contracts," RAND Journal of Economics, The RAND Corporation, vol. 26(4), pages 654-672, Winter. [Downloadable!] (restricted)
  23. Baron, David P & Besanko, David, 1992. "Information, Control, and Organizational Structure," Journal of Economics & Management Strategy, Blackwell Publishing, vol. 1(2), pages 237-75, Summer.
  24. James A. Mirrlees, 1976. "The Optimal Structure of Incentives and Authority Within an Organization," Bell Journal of Economics, The RAND Corporation, vol. 7(1), pages 105-131, Spring. [Downloadable!] (restricted)
  25. Michael Keren & David Levhari, 1983. "The Internal Organization of the Firm and the Shape of Average Costs," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 474-486, Autumn. [Downloadable!] (restricted)
  26. Bengt Holmstrom, 1979. "Moral Hazard and Observability," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 74-91, Spring. [Downloadable!] (restricted)
  27. Qian, Yingyi, 1994. "Incentives and Loss of Control in an Optimal Hierarchy," Review of Economic Studies, Blackwell Publishing, vol. 61(3), pages 527-44, July. [Downloadable!] (restricted)
  28. Rotemberg, Julio J, 1994. "Human Relations in the Workplace," Journal of Political Economy, University of Chicago Press, vol. 102(4), pages 684-717, August. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. 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. [Downloadable!]
  2. 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. [Downloadable!]
  3. Celik, Gorkem, 2004. "Mechanism Design with Collusive Supervision," Micro Theory Working Papers celik-04-09-13-05-42-19, Microeconomics.ca Website, revised 06 Aug 2008. [Downloadable!]
    Other versions:
  4. Frédéric E. Sautet & Nicolai J. Foss, . "The Organization of Large, Complex Firms: An Austrian View," IVS/CBS Working Papers 99-7, Department of Industrial Economics and Strategy, Copenhagen Business School. [Downloadable!]
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