Collusion and Selective Supervision
UNSW Australia Business School, School of Economics
July 4, 2011
This paper studies a mechanism-design problem involving a principal-supervisor-agent in which collusion between supervisor and agent can only occur after they have decided to participate in the mechanism. We show how collusion can be eliminated at no cost via the use of a mechanism in which the principal endogenously determines the scope of supervision. A simple example of such a mechanism is one in which the agent bypasses the supervisor and directly contracts with the principal in some states of the world. The result that collusion can be eliminated at no cost in this environment highlights the important assumptions required for collusion to be a salient issue in the existing literature. The result is robust to alternative information structures, collusive behaviours and specification of agent's types. Applications include work contracts with different degrees of supervision, self-reporting of crimes, tax amnesties, immigration amnesties and mechanisms based on recommendation letters.
Number of Pages in PDF File: 47
Keywords: Collusion, supervision, selective supervision, delegation, mechanism design, revelation principle
JEL Classification: D82, C72, L51
Date posted: September 6, 2011