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A Theory of Supervision with Endogenous Transaction Costs

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  • Faure-Grimaud, Antoine
  • Laffont, Jean-Jacques
  • Martimort, David

Abstract

We propose a theory of supervision with endogenous transaction costs. A principle delegates part of his authority to a supervisor who can acquire soft information about an agent's productivity. If the supervisor were risk-neutral, the principal would simply make the better informed supervisor residual claimant for the hieracrchy's profit. Under risk aversion, the optimal contract trades-off the supervisor's incentives to reveal his information with an insurance motive. This contract can be identified with the one obtained in a simple hard information model of hierarchical collusion with exogenous transaction costs. Now, transaction costs are endogenous and depend on the collusion stake, the accuracy of the supervisory technology and the supervisor's degree of risk-aversion. We then discuss various implications of the model for the design and management of organizations.

Suggested Citation

  • Faure-Grimaud, Antoine & Laffont, Jean-Jacques & Martimort, David, 1998. "A Theory of Supervision with Endogenous Transaction Costs," CEPR Discussion Papers 1967, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:1967
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    2. Faure-Grimaud, Antoine & Laffont, Jean-Jacques & Martimort, David, 1999. "The endogenous transaction costs of delegated auditing," European Economic Review, Elsevier, vol. 43(4-6), pages 1039-1048, April.
    3. Jonathan Treussard, 2005. "Life-Cycle Consumption Plans and Portfolio Policies in a Heath-Jarrow-Morton Economy," Boston University - Department of Economics - Working Papers Series WP2005-033, Boston University - Department of Economics.
    4. Celik, Gorkem, 2009. "Mechanism design with collusive supervision," Journal of Economic Theory, Elsevier, vol. 144(1), pages 69-95, January.
    5. Migrow, Dimitri, 2021. "Designing communication hierarchies," Journal of Economic Theory, Elsevier, vol. 198(C).
    6. Scholz, Julia, 2008. "Auswirkungen vertikaler Kollusionsprobleme auf die vertragliche Ausgestaltung von Kreditverkäufen," Discussion Papers in Business Administration 4581, University of Munich, Munich School of Management.
    7. Laffont, Jean-Jacques, 1999. "Political economy, information and incentives1," European Economic Review, Elsevier, vol. 43(4-6), pages 649-669, April.
    8. Ling‐Chieh Kung & Ying‐Ju Chen, 2011. "Monitoring the market or the salesperson? The value of information in a multilayer supply chain," Naval Research Logistics (NRL), John Wiley & Sons, vol. 58(8), pages 743-762, December.
    9. Billy Jack, 2003. "Comparing the distortionary effects of alternative in-kind intergovernmental transfers," Working Papers gueconwpa~03-03-17, Georgetown University, Department of Economics.

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    More about this item

    Keywords

    Collusion; endogenous transaction costs; soft information; supervision;
    All these keywords.

    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; Insider Trading
    • 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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