Moral Hazard in Hierarchies and Soft Information
AbstractWe investigate the scope for supervisory activities in organizations in which information is non-verifiable and opportunism severe. A principal-supervisor-agent hierarchy is considered. Side-contracts between supervisor and agent may be reached both before and after the agent has chosen his hidden action. We find that the supervisor is useful if and only if appointed before the agent has chosen his action. We also show that delegation of payroll authority is suboptimal. Finally, some insights concerning the optimal design of verification activities are provided: when information is non-verifiable, the supervisor should be employed as a monitor rather than as an auditor.
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Bibliographic InfoPaper provided by Toulouse School of Economics (TSE) in its series TSE Working Papers with number 12-343.
Date of creation: Oct 2012
Date of revision:
collusion; extortion; delegation; mechanism design;
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-11-11 (All new papers)
- NEP-BEC-2012-11-11 (Business Economics)
- NEP-CTA-2012-11-11 (Contract Theory & Applications)
- NEP-HRM-2012-11-11 (Human Capital & Human Resource Management)
- NEP-MIC-2012-11-11 (Microeconomics)
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