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Supervisory Efficiency and Collusion in a Multiple-Agent Hierarchy

Author

Listed:
  • Che, X.
  • Huang, Y.
  • Zhang, L.

Abstract

We analyze a principal-supervisor-two-agent hierarchy with inefficient supervision. The su-pervisor may collects a wrong signal on each agent’s unobservable effort level. When reportingto the principal, the supervisor can collude with one or both agents to manipulate the signalin exchange for a bribe. In contract design, we identify a new trade-off between the loss fromsupervisor-agent collusion and the risk from inefficient supervision: Although allowing collu-sion makes shirking more attractive to the agents, it brings in a benefit because it can “correct”an incorrect negative signal when the agent has exerted effort. Such collusive supervision savesrisk premiums that the principal has to pay for incentive provision. We characterize the princi-pal’s optimal contract choice among no-supervision, collusion-proof, and collusive-supervisioncontracts. We show that the collusive-supervision contract dominates when the supervisory ef-ficiency is at an intermediate level.

Suggested Citation

  • Che, X. & Huang, Y. & Zhang, L., 2020. "Supervisory Efficiency and Collusion in a Multiple-Agent Hierarchy," Working Papers 20/01, Department of Economics, City St George's, University of London.
    • Handle: RePEc:cty:dpaper:20/01
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    File URL: https://openaccess.city.ac.uk/id/eprint/23485/1/Dept_Econ_WP2001.pdf
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    Cited by:

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    9. Shi, Xin & Jiang, Haizhou & Li, Huan & Xu, Dong, 2020. "Maritime cluster research: Evolutionary classification and future development," Transportation Research Part A: Policy and Practice, Elsevier, vol. 133(C), pages 237-254.
    10. Yoo, Yeawon & Escobedo, Adolfo R. & Skolfield, J. Kyle, 2020. "A new correlation coefficient for comparing and aggregating non-strict and incomplete rankings," European Journal of Operational Research, Elsevier, vol. 285(3), pages 1025-1041.

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    Keywords

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    JEL classification:

    • D73 - Microeconomics - - Analysis of Collective Decision-Making - - - Bureaucracy; Administrative Processes in Public Organizations; Corruption
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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