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Monitoring Subcontracting in a Suppliers` Hierachy

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Author Info
Michela Cella

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Abstract

In this paper we study the delegation of a production process in a three-tier hierarchy. The principal contracts directly only with the supplier that produces the first input leaving him in charge of the contract for the production of the second input. We allow the principal to costlessly monitor the communication between the agents at the subcontracting stage in an attempt to save on informational rents and improve productive efficiency. We show that, if the contractor is free to choose the type of subcontract, he must be given additional incentives to acquire information about the subcontractor which will then be the object of the monitoring. The monitoring is therefore much less effective then when the principal can force the contractor into choosing her preferred subcontract.

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Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 233.

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Date of creation: 2005
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Handle: RePEc:oxf:wpaper:233

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Related research
Keywords: Adverse Selection; Hierarchies; Delegation; Monitoring;

Find related papers by JEL classification:
D20 - Microeconomics - - Production and Organizations - - - General
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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References listed on IDEAS
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  1. Myerson, Roger B, 1983. "Mechanism Design by an Informed Principal," Econometrica, Econometric Society, vol. 51(6), pages 1767-97, November. [Downloadable!] (restricted)
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  2. Faure-Grimaud, Antoine & Laffont, Jean-Jacques & Martimort, David, 2003. "Collusion, Delegation and Supervision with Soft Information," IDEI Working Papers 167, Institut d'Économie Industrielle (IDEI), Toulouse. [Downloadable!]
    Other versions:
  3. Dilip Mookherjee & Masatoshi Tsumagari, 2004. "The Organization of Supplier Networks: Effects of Delegation and Intermediation," Econometrica, Econometric Society, vol. 72(4), pages 1179-1219, 07. [Downloadable!] (restricted)
  4. Maskin, Eric & Tirole, Jean, 1990. "The Principal-Agent Relationship with an Informed Principal: The Case of Private Values," Econometrica, Econometric Society, vol. 58(2), pages 379-409, March. [Downloadable!] (restricted)
  5. Jean-Jacques Laffont & David Martimort, 2000. "Mechanism Design with Collusion and Correlation," Econometrica, Econometric Society, vol. 68(2), pages 309-342, March.
    Other versions:
  6. 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)
  7. Faure-Grimaud, Antoine & Martimort, David, 2001. "On some agency costs of intermediated contracting," Economics Letters, Elsevier, vol. 71(1), pages 75-82, April. [Downloadable!] (restricted)
  8. 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.
  9. Tirole, Jean, 1991. "Collusion and the Theory of Organizations," IDEI Working Papers 9, Institut d'Économie Industrielle (IDEI), Toulouse.
  10. Jean-Jacques Laffont & David Martimort, 1997. "Collusion under Asymmetric Information," Econometrica, Econometric Society, vol. 65(4), pages 875-912, July.
    Other versions:
  11. 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.
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