34 Pages Posted: 18 Oct 2012 Last revised: 24 Feb 2014
Date Written: January 1, 2014
This paper shows that the threat of collusion between a productive agent and the auditor in charge of monitoring production can influence a number of organizational dimensions of the firm, including outsourcing decisions and the allocation of production costs. We find that the optimal organizational response to internal collusion lets the agent choose between working outside the firm (no monitoring and full claims over production costs) or within the firm (monitoring but no claims over costs). In equilibrium, there are no rents due to collusion. The results are robust to a number of extensions.
Keywords: Collusion, Supervision, Mechanism design, Theory of the Firm, Outsourcing
JEL Classification: D82, C72, D23
Suggested Citation: Suggested Citation
By Mehmet Bac