A Theory of Supervision with Endogenous Transaction Costs

Antoine Faure-Grimaud, Jean-Jacques Laffont and David Martimort
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Antoine Faure-Grimaud: Institute of Management and FMG at the London School of Economics, and CEPR

No 21, CEMA Working Papers from China Economics and Management Academy, Central University of Finance and Economics

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 organizations.

Keywords: Supervision; Soft information; Collusion; Endogenous transaction costs (search for similar items in EconPapers)
JEL-codes: D82 G14 G32 L51 (search for similar items in EconPapers)
Pages: 33 pages
Date: 1999-11, Revised 2000-10
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Citations: View citations in EconPapers (7)

Published in Annals of Economics and Finance, Nov 2000, pages 231-263

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Related works:
Journal Article: 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)
Working Paper: A theory of supervision with endogenous transaction costs (1998)
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