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Quality monitoring, collusion and sub-contracting


  • Kuhn, Michael
  • Yan, Qianhui


We discuss the social welfare improvement under centralized and decentralized hierarchies and focus on supervisoris ability to monitor quality. Although the possibility of collusion against the principal is eliminated under decentralized hierarchy, the decentralization is dominating only if supervisory accuracy is large enough in the case of public information. Private information about the accuracy hurts the principal under both hierarchies. The optimal effort in hierarchy A is pooling one. The dominance of decentralization over centralization depend combination of accuracies of both the low and the high type supervisor.

Suggested Citation

  • Kuhn, Michael & Yan, Qianhui, 2006. "Quality monitoring, collusion and sub-contracting," Thuenen-Series of Applied Economic Theory 70, University of Rostock, Institute of Economics.
  • Handle: RePEc:zbw:roswps:70

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    References listed on IDEAS

    1. 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.
    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. Maskin, Eric & Tirole, Jean, 1992. "The Principal-Agent Relationship with an Informed Principal, II: Common Values," Econometrica, Econometric Society, vol. 60(1), pages 1-42, January.
    4. Jean-Jacques Laffont & Jean Tirole, 1993. "A Theory of Incentives in Procurement and Regulation," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121743, July.
    5. Gravelle, Hugh, 1999. "Capitation contracts: access and quality," Journal of Health Economics, Elsevier, vol. 18(3), pages 315-340, June.
    6. 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.
    7. Baron, David P & Besanko, David, 1992. "Information, Control, and Organizational Structure," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 1(2), pages 237-275, Summer.
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    More about this item


    auditing; collusion; delegation; hierarchy; quality;

    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
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure


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