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A Theory of Supervision with Endogenous Transaction Costs

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

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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Bibliographic Info

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

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References

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  1. Canice Prendergast & Robert H. Topel, 1993. "Favoritism in Organizations," NBER Working Papers 4427, National Bureau of Economic Research, Inc.
  2. Philippe Aghion & Jean Tirole, 1994. "Normal and Real Authority in Organizations," Working papers 94-13, Massachusetts Institute of Technology (MIT), Department of Economics.
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  4. Laffont, Jean-Jacques, 1990. "Analysis of Hidden Gaming in a Three-Level Hierarchy," Journal of Law, Economics and Organization, Oxford University Press, Oxford University Press, vol. 6(2), pages 301-24, Fall.
  5. Laffont, Jean-Jacques & Martimort, David, 1998. "Mechanism Design with Collusion and Correlation," IDEI Working Papers 81, Institut d'Économie Industrielle (IDEI), Toulouse.
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  16. Qian, Yingyi, 1994. "Incentives and Loss of Control in an Optimal Hierarchy," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 61(3), pages 527-44, July.
  17. Cremer, Jacques & McLean, Richard P, 1988. "Full Extraction of the Surplus in Bayesian and Dominant Strategy Auctions," Econometrica, Econometric Society, Econometric Society, vol. 56(6), pages 1247-57, November.
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  19. Calvo, Guillermo A & Wellisz, Stanislaw, 1979. "Hierarchy, Ability, and Income Distribution," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 87(5), pages 991-1010, October.
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  21. 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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  24. Martimort, David, 1999. "The Life Cycle of Regulatory Agencies: Dynamic Capture and Transaction Costs," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 66(4), pages 929-47, October.
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Cited by:
  1. Celik, Gorkem, 2004. "Mechanism Design with Collusive Supervision," Microeconomics.ca working papers, Vancouver School of Economics celik-04-09-13-05-42-19, Vancouver School of Economics, revised 06 Aug 2008.
  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, Boston University - Department of Economics WP2005-033, Boston University - Department of Economics.
  3. Scholz, Julia, 2008. "Auswirkungen vertikaler Kollusionsprobleme auf die vertragliche Ausgestaltung von Kreditverkäufen," Discussion Papers in Business Administration, University of Munich, Munich School of Management 4581, University of Munich, Munich School of Management.
  4. Billy Jack, 2003. "Comparing the distortionary effects of alternative in-kind intergovernmental transfers," Working Papers, Georgetown University, Department of Economics gueconwpa~03-03-17, Georgetown University, Department of Economics.
  5. 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.

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