Conditional Delegation and Optimal Supervision
AbstractThis paper analyzes a simple modification of a standard mechanism in hierarchical centralized structures with hard-information supervision. The supervisor receives a signal about the productive agent's technology. With some probability the supervisor learns the true agent's technology, otherwise she learns nothing. Our design lets the productive agent choose between two competing contracts, a "secure" contract or a grand contract subject to uncertainty. The mechanism eliminates agency costs by providing the productive agent with the possibility of avoiding inspection. When productive agent is risk averse, our mechanism also provides him with an insurance coverage: as a consequence, this mechanism would be worthwhile even abstracting from collusion.
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Bibliographic InfoPaper provided by Dipartimento di Scienze Economiche "Marco Fanno" in its series "Marco Fanno" Working Papers with number 0095.
Length: 28 pages
Date of creation: 2009
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-03-22 (All new papers)
- NEP-BEC-2009-03-22 (Business Economics)
- NEP-CTA-2009-03-22 (Contract Theory & Applications)
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