The Threat of Corruption and the Optimal Supervisory Task

Alessandro De Chiara and Luca Livio ()

Working Papers ECARES from ULB -- Universite Libre de Bruxelles

Abstract: In this paper we investigate the task the supervisor should be optimally charged with in an agency modelin which the principal faces corruption concerns. We highlight a fundamental tradeoff between monitoringthe agent’s effort choice and auditing it ex-post. Monitoring proves more effective in tackling corruptionsince the supervisor sends the report before the profit realization. By taking advantage of the supervisor’suncertainty about the state of nature, the principal can design a compensation scheme which prevents allforms of corruption at a lower cost. Conversely auditing reduces the cost of supervision as the principalhires the supervisor only if the profit does not convey enough information about the compensation due tothe agent. We show that the ultimate choice between monitoring and auditing depends on the supervisor’sability to falsify information and the cost of performing an inspection.

Keywords: auditing; collusion; corruption; extortion; monitoring; supervision (search for similar items in EconPapers)
JEL-codes: D82 D86 L22 (search for similar items in EconPapers)
Pages: 46 p.
Date: 2015-10
New Economics Papers: this item is included in nep-acc, nep-hrm and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Journal Article: The threat of corruption and the optimal supervisory task (2017)
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