A Theory of Supervision with Endogenous Transaction Costs

43 Pages Posted: 16 Jul 2008

See all articles by Antoine Faure-Grimaud

Antoine Faure-Grimaud

London School of Economics; Centre for Economic Policy Research (CEPR)

Jean-Jacques Laffont

affiliation not provided to SSRN

David Martimort

University of Toulouse 1 - Industrial Economic Institute (IDEI); CESifo (Center for Economic Studies and Ifo Institute)

Multiple version iconThere are 2 versions of this paper

Date Written: July 1998

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.

JEL Classification: D20, D80, H11, H70, L22, P11

Suggested Citation

Faure-Grimaud, Antoine and Laffont, Jean-Jacques and Martimort, David, A Theory of Supervision with Endogenous Transaction Costs (July 1998). LSE STICERD Research Paper No. TE356. Available at SSRN: https://ssrn.com/abstract=1160960

Antoine Faure-Grimaud (Contact Author)

London School of Economics ( email )

Houghton Street
London WC2A 2AE
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+44 20 7955 6041 (Phone)
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Centre for Economic Policy Research (CEPR)

London
United Kingdom

Jean-Jacques Laffont

affiliation not provided to SSRN

No Address Available

David Martimort

University of Toulouse 1 - Industrial Economic Institute (IDEI) ( email )

Manufacture des Tabacs
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Toulouse Cedex, F-31000
France
+33 5 6112 8614 (Phone)
+33 5 6112 8637 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

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Munich, DE-81679
Germany

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