A Theory of Supervision with Endogenous Transaction Costs

Antoine Faure-Grimaud, Jean-Jacques Laffont and David Martimort

STICERD - Theoretical Economics Paper Series from Suntory and Toyota International Centres for Economics and Related Disciplines, LSE

Abstract: We propose a theory of supervision with endogenous transaction costs. A principal delegates part of his authority to a supervisor who can acquire soft information about an agent's productivity. If the supervisor were risk-neutral, the principal would simply make the better informed supervisor residual claimant for the hierarchy's profit. Under risk-aversion, the optimal contract trades-off the supervisor's incentives to reveal his information with an insurance motive. This contract can be identified with the one obtained in a simple hard information model of hierarchical collusion with exogenous transaction costs. Now, transaction costs are endogenous and depend on the collusion stake, the accuracy of the supervisory technology and the supervisor's degree of risk-aversion. We then discuss various implications of the model for the design and management of organisations.

Keywords: Supervision; soft information; collusion; endogenous transaction costs (search for similar items in EconPapers)
Date: 1998-07
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
https://sticerd.lse.ac.uk/dps/te/te356.pdf (application/pdf)

Related works:
Journal Article: A Theory of Supervision with Endogenous Transaction Costs (2000)
Working Paper: A Theory of Supervision with Endogenous Transaction Costs (2000)
Working Paper: A Theory of Supervision with Endogenous Transaction Costs (1998)
Working Paper: A theory of supervision with endogenous transaction costs (1998)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cep:stitep:356

Access Statistics for this paper

More papers in STICERD - Theoretical Economics Paper Series from Suntory and Toyota International Centres for Economics and Related Disciplines, LSE
Bibliographic data for series maintained by ().