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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. Copyright The Review of Economic Studies Limited, 2003.

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Bibliographic Info

Paper provided by Institut d'Économie Industrielle (IDEI), Toulouse in its series IDEI Working Papers with number 167.

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Date of creation: 2003
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Publication status: Published in The Review of Economic Studies, vol. 70, n°2, 2003, p. 253-280.
Handle: RePEc:ide:wpaper:637

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Find related papers by JEL classification:

• D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
• G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
• G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
• L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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