Kouroche VAFAI (Université de Paris 5)
« The Structure of the Firm »
Abstract: This paper studies how an organization is affected by biased supervision. An agency relationship where a principal relies on a supervisor to obtain a verifiable report on an agent’s output is considered. Depending on the output he has observed, the supervisor may either collude with the agent or with the principal, and make an uninformative report. We characterize the optimal incentive contracts in this environment and investigate how collusive activities interact. Compared with the case where the agency relationship is exposed to a single type of collusion, under the threat of two types of collusion, the configuration of the optimal preventive policy is modified, collusion between the supervisor and the agent is not harmless anymore, the expected cost of collusion prevention increases, and the supervisor more often receives a rent.