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Truthful Reporting, Moral Hazard and Purely Soft Information

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  • Alessandro De Chiara
  • Luca Livio

Abstract

We examine a hierarchical model where a principal hires a risk averse supervisor to monitor the e ort exerted by a productive agent. We assume that the supervisor can misreport the collected evidence without incurring any cost. We develop a corruption-proof contract which makes it sequentially rational for the supervisor to report truthfully. Crucial features of our contract are the timing at which the report is sent and the supervisor's payment scheme. In particular, the report must be sent before the outcome observation and the principal must reward the supervisor if and only if her report maximizes the conditional probability of the realized outcome. We also highlight a non-trivial interplay between corruption incentives, the signal precision and the supervisor's risk aversion.

Suggested Citation

  • Alessandro De Chiara & Luca Livio, 2012. "Truthful Reporting, Moral Hazard and Purely Soft Information," Working Papers ECARES ECARES 2012-029, ULB -- Universite Libre de Bruxelles.
  • Handle: RePEc:eca:wpaper:2013/126622
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    References listed on IDEAS

    as
    1. Hiriart, Yolande & Martimort, David & Pouyet, Jerome, 2010. "The public management of risk: Separating ex ante and ex post monitors," Journal of Public Economics, Elsevier, vol. 94(11-12), pages 1008-1019, December.
    2. Jean-Jacques Laffont & Jean Tirole, 1991. "The Politics of Government Decision-Making: A Theory of Regulatory Capture," The Quarterly Journal of Economics, Oxford University Press, vol. 106(4), pages 1089-1127.
    3. Mookherjee, Dilip & Png, I P L, 1995. "Corruptible Law Enforcers: How Should They Be Compensated?," Economic Journal, Royal Economic Society, vol. 105(428), pages 145-159, January.
    4. Steven Shavell & A. Mitchell Polinsky, 2000. "The Economic Theory of Public Enforcement of Law," Journal of Economic Literature, American Economic Association, vol. 38(1), pages 45-76, March.
    5. Baliga, Sandeep, 1999. "Monitoring and Collusion with "Soft" Information," Journal of Law, Economics, and Organization, Oxford University Press, vol. 15(2), pages 434-440, July.
    6. Antoine Faure-Grimaud & Jean-Jacques Laffont & David Martimort, 2003. "Collusion, Delegation and Supervision with Soft Information," Review of Economic Studies, Oxford University Press, vol. 70(2), pages 253-279.
    7. Bengt Holmstrom, 1979. "Moral Hazard and Observability," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 74-91, Spring.
    8. Hindriks, Jean & Keen, Michael & Muthoo, Abhinay, 1999. "Corruption, extortion and evasion," Journal of Public Economics, Elsevier, vol. 74(3), pages 395-430, December.
    9. Kofman, Fred & Lawarree, Jacques, 1993. "Collusion in Hierarchical Agency," Econometrica, Econometric Society, vol. 61(3), pages 629-656, May.
    10. Thierry Verdier & Daron Acemoglu, 2000. "The Choice between Market Failures and Corruption," American Economic Review, American Economic Association, vol. 90(1), pages 194-211, March.
    11. Tirole, Jean, 1986. "Hierarchies and Bureaucracies: On the Role of Collusion in Organizations," Journal of Law, Economics, and Organization, Oxford University Press, vol. 2(2), pages 181-214, Fall.
    12. Laffont, Jean-Jacques & Tirole, Jean, 1991. "Auction design and favoritism," International Journal of Industrial Organization, Elsevier, vol. 9(1), pages 9-42, March.
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    Blog mentions

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    1. How to best compensate a supervisor
      by Economic Logician in Economic Logic on 2012-09-24 19:46:00

    More about this item

    Keywords

    corruption; moral hazard; soft information; supervision; truthful reporting;

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