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Two Types of Collusion in a Model of Hierarchical Agency

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  • Mehmet Bac
  • Serkan Kucuksenel

Abstract

The standard ex post type of collusion is a supervisor-agent agreement to misrepresent the outcome of supervision. Under ex ante collusion the agent makes a side transfer to the supervisor, who, in return, stops monitoring the agent's productivity. Extending Tirole's [1986] model of hierarchy to include ex ante collusion and supervision costs, we show that the principal can ignore ex ante collusion and the supervisor's incentive constraint if supervision technology is likely to generate information at a low cost. To prevent ex ante collusion the principal increases the difference between the wages paid when the supervisor's report is empty and when it contains productivity evidence.

Suggested Citation

  • Mehmet Bac & Serkan Kucuksenel, 2006. "Two Types of Collusion in a Model of Hierarchical Agency," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 162(2), pages 262-276, June.
  • Handle: RePEc:mhr:jinste:urn:sici:0932-4569(200606)162:2_262:ttocia_2.0.tx_2-j
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    References listed on IDEAS

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    1. Kofman, Fred & Lawarree, Jacques, 1993. "Collusion in Hierarchical Agency," Econometrica, Econometric Society, vol. 61(3), pages 629-656, May.
    2. Laffont, Jean-Jacques, 1990. "Analysis of Hidden Gaming in a Three-Level Hierarchy," Journal of Law, Economics, and Organization, Oxford University Press, vol. 6(2), pages 301-324, Fall.
    3. Bac, Mehmet, 1996. "Corruption, Supervision, and the Structure of Hierarchies," Journal of Law, Economics, and Organization, Oxford University Press, vol. 12(2), pages 277-298, October.
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    Cited by:

    1. Kemal Saygili & Serkan Kucuksenel, 2018. "Other-Regarding Preferences in Organizational Hierarchies," ERC Working Papers 1802, ERC - Economic Research Center, Middle East Technical University, revised Feb 2018.

    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure

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