 Supervisory Efficiency and Collusion in a Multiple-Agent HierarchyX. Che, Y. Huang and L. Zhang Working Papers from Department of Economics, City University London 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. Keywords: Optimal contract; hierarchy; collusion; supervisory efficiency; multiple agents (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:cty:dpaper:20/01 Access Statistics for this paper More papers in Working Papers from Department of Economics, City University London Department of Economics, Social Sciences Building, City University London, Whiskin Street, London, EC1R 0JD, United Kingdom,. Contact information at EDIRC. |
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