Supervisory Efficiency, Collusion, and Contract Design

Posted: 10 Mar 2018

See all articles by Xiaogang Che

Xiaogang Che

Durham University Business School

Yangguang Huang

Hong Kong University of Science & Technology (HKUST) - Department of Economics

Le Zhang

Macquarie University - Macquarie Graduate School of Management; Macquarie University, Macquarie Business School

Date Written: March 6, 2018

Abstract

We analyze a principal-supervisor-two-agent hierarchy with soft information. The supervisor may be inefficient such that a noisy signal on the agents’ effort levels is observed. On one hand, the agents require risk premiums to work due to the noisy signal. On the other hand, the supervisor and the agents may collude against the principal. We identify a new trade-off between inefficient supervision and supervisor-agent collusion, showing that under certain conditions tolerating collusion to take place helps to “correct” wrong supervisory signals and thus benefits the principal. Furthermore, the characterization of the collusive-supervision contract shows that collusion should be allowed with one agent only.

Keywords: Supervision Efficiency, Multiple Agents, Soft Information, Collusion

JEL Classification: D73, D82, D86

Suggested Citation

Che, Xiaogang and Huang, Yangguang and Zhang, Le, Supervisory Efficiency, Collusion, and Contract Design (March 6, 2018). Macquarie University Faculty of Business & Economics Research Paper. Available at SSRN: https://ssrn.com/abstract=3135541

Xiaogang Che (Contact Author)

Durham University Business School ( email )

Mill Hill Lane
Durham, DH1 3LB
United Kingdom

Yangguang Huang

Hong Kong University of Science & Technology (HKUST) - Department of Economics ( email )

Clear Water Bay
Kowloon, Hong Kong
China

Le Zhang

Macquarie University - Macquarie Graduate School of Management ( email )

Macquarie University, Macquarie Business School ( email )

New South Wales 2109
Australia

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