Opportunism in Organizations

Kouroche Vafaï

The Journal of Law, Economics, and Organization, 2010, vol. 26, issue 1, 158-181

Abstract: This article characterizes the incentive contracts that optimally immunize an organization against the opportunistic activities of its members. We analyze an agency relationship with moral hazard where a principal relies on a supervisor to obtain verifiable information about an agent's output. The supervisor's discretion allows him to engage in two types of individual opportunism, namely abuse of power and abuse of authority, as well as two types of group opportunism, namely collusion with the agent and collusion with the principal. Individual opportunism occurs when the supervisor asks a tribute to reveal information, whereas group opportunism occurs when the supervisor receives a bribe to conceal information. We find that the effective, and hence most noxious, form of opportunism is individual opportunism and derive the opportunism-proof contracts, that is, the optimal contracts that protect the organization against both individual and group opportunism. The Author 2009. Published by Oxford University Press on behalf of Yale University. All rights reserved. For permissions, please email: journals.permissions@oxfordjournals.org, Oxford University Press.

Date: 2010
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