Evidence Forging Collusions in Hierarchical Organizations

Dae Sik Lee
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Dae Sik Lee: Pusan National University

Korean Economic Review, 1994, vol. 10, 155-180

Abstract: We study the problem of designing some optimal collusion free contracts in the simple three-tier principal/supervisor/agent hierarchical structures. We confider two types of information manipulation as a coalition between the supervisor and the agents : (I) Ignoring relevant information and (II) Creating false information. We show that the principal can design optimal collusion free contracts with some additional cost by putting proper incentive compatibility conditions and individual rationality conditions. We find that the optimal collusion contract is the prespecified allocation rule, so that the evaluation about the agent does not depend on the report by the supervisor, who is simultaneously "judge and party': In our model, it turns out that the supervisor has a degree of freedom to act either as an advocator for the principal or for the agent or neither, which is differ from the Tirole(1986)'s main results that the supervisor naturally acts as an advocator for the agent We find that the role and the behavior of the supervisor within the hierarchical organization crucially depend upon not only the possibility of collusion but more importantly the nature of collusion, which is the nature of information manipulation.

Date: 1994
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