Preemptive collusion among corruptible law enforcers

This paper considers collusion between a supervisor and an agent within a Principal–Supervisor–Agent model. Other papers consider the possibility of collusion after the supervisor has exerted costly effort to obtain hard (“verifiable”) evidence regarding the agent’s actions, information which, if reported would result in the agent being fined with a certain probability. That is, collusion occurs because the supervisor may accept a bribe in exchange for hiding the information he has obtained. This paper allows the supervisor and the agent to enter into a collusive contract either before or after the supervisor has exerted effort to find verifiable information regarding the agent’s actions. The former type of collusion, which occurs after the supervisor has exerted effort, entails ex-post corruption, while the latter, which occurs before the supervisor has exerted effort, entails preemptive corruption. This paper shows that although raising the supervisor’s reward discourages ex-post corruption, it can simultaneously encourage preemptive corruption. Hence, raising the supervisor’s reward will not always discourage collusion. This result further implies that though privatizing law enforcement can always be used to eliminate ex-post corruption, it cannot be used to eliminate preemptive corruption. Furthermore, when compared to ex-post collusion, an equilibrium without corruption is always socially preferred. However, when compared to preemptive collusion, an equilibrium without corruption may not always be socially preferred.     

Beneficial collusion in corruption control: The case of nonmonetary penalties

We analyze a corruption model where a principal seeks to control an agent's corruption by supplementing a costless noncollusive outside detector such as the media with a collusive internal supervisor. The principal's objective is to minimize the overall costs, made up of enforcement costs and social costs of corruption. If the penalties on the corrupt agent and a failing supervisor are nonmonetary in nature and yet the two parties can engage in monetary side-transfers, the principal may stand to benefit by allowing supervisor–agent collusion. This benefit may even prompt the principal to actively encourage collusion by hiring a dishonest supervisor in strict preference over an honest supervisor.     

国有控股公司治理中合谋防御的机制设计

本文对委托人、监督者和代理人的主体进行重新界定,并对无合谋防御机制时的情形作了分析,再针对合谋行为设计出监督者主导和委托人主导两种合谋防御机制。在监督者主导的防御机制中,委托人事前给出一组契约,授权监督者向代理人提供子契约,委托人提供的契约可使得监督者和代理人所得到的转移支付都不小于其实施合谋时的信息租金,让监督者和代理人没有激励进行合谋。在委托人主导型的防御机制中,委托人同时与监督者和代理人签订契约,如代理人谎报自己的成本类型,委托人会对代理人实施罚金,而给予监督者奖励,让监督者有动力积极履行职责,且能激励高成本类型的代理人降低生产成本。     

Controlling Corruption in Hierarchies

We re-examine alternative hierarchical designs for controlling corruption as studied by Bac (J. Comp. Econom.22,2:99–118), since his formulation of the principal's problem was incomplete. In a basic hierarchy, while collusion between a supervisor and his subordinate agent may prevent implementation of high corruption outcomes, the principal would be able to induce relatively low corruption outcomes. In a two-level decentralized supervision chain, internal collusion in the upper part always induces collusion at the bottom but not vice-versa. For nonincreasing returns-to-scale monitoring technologies, the principal prefers a decentralized hierarchy to a centralized hierarchy.J. Comp. Econom.,December 1997,25(3), pp. 322–344. Department of Economics and Accounting, University of Liverpool, Liverpool, L69 3BX, United Kingdom.     

Collusion and the organization of delegated expertise

We study the optimal design of incentive contracts for experts in different collusion environments, and explore implications for the organization of delegated expertise. We consider a principal relying on experts to gather and report two signals about a project's value. The principal can have a single expert gather both signals or two experts gather one signal each. We show that absent collusion, the multiexpert organization dominates the single expert organization. However, this ranking is reversed when the experts can collude among themselves (horizontal collusion) and with the principal (vertical collusion).     

Informed principal with correlation

In this paper we analyze an adverse selection model with one principal and one agent, who are both risk neutral and have private information. We assume that the private information of the principal is correlated with that of the agent. The main result of the paper is that the principal can extract a larger share of the surplus from the agent than in the case where her information is public. The principal can design such a contract because she exploits the fact that her type is an informative signal on the agent's one. We fully characterize the equilibrium of the game in which different types of principal offer the same menu of contracts that leaves the agent uninformed about the principal's type. This gives more freedom to the principal when setting the transfers because the agent's constraints need to hold only at an interim stage.     

Optimal incentive contracts with multiple agents

A setting in which a single principal contracts with two agents who possess perfect private information about their own productivity is considered. With correlated productivities, each agent's private information also provides a signal about the other agent's productivity. In contrast to the setting in which there is only one agent, it is shown that such private information may be of no value to the agents. It is only if the agents are risk-averse that their private information may allow them to command rents. Moreover, when the agents are constrained only to reveal their private information truthfully as a Nash equilibrium, the Pareto optimal incentive scheme may induce the agents to adopt strategies other than truth-telling. This leads to the consideration of truth-telling equilibria that are not Pareto dominated in the subgame played by the agents. Among all such equilibria, the one preferred by the principal restricts one agent to tell the truth as a dominant strategy and the other as a Nash response to truth.     

Reciprocal Supervision,Collusion and Organizational Design

We study the design of supervisory functions in an organization with one principal and two agents. Each agent can perform supervision activities regarding the other agent. We characterize the way the principal must structure incentive payments to avoid any collusive activity between agents. In particular, it is shown that better mutual information between agents may hurt the principal. The other main result is the possibility that it may be better to give up one supervisory function or to have a third party be the supervisor if possible. Finally, we show that such a dual supervisory structure raises the possibility that letting collusion happen may be the best policy.     

The simple analytics of information and experimentation in dynamic agency

Summary. The dynamics of a stochastic, two–period principal–agent relationship is studied. The agent's type remains the same over time. Contracts are short term. The principal designs the second contract, taking the information available about the agent after the first period into account. Compared to deterministic environments significant changes emerge: First, fully separating contracts are optimal. Second, the principal has two opposing incentives when designing contracts: the principal ‘experiments,’ making signals more informative; yet dampens signals, thereby reducing up–front payments. As a result, ‘good’ agents' targets are ratcheted over time. Received: November 28, 2000; revised version: December 1, 2000     

Why it Pays to Conceal: On the Optimal Timing of Acquiring Verifiable Information

Abstract. We consider optimal contracts when a principal has two sources to detect bad projects. The first one is an information technology without agency costs (IT_P), whereas the second one is the expertise of an agent subject to moral hazard, adverse selection and limited liability (IT_A). First, we show that the principal does not necessarily benefit from access to additional information and thereby may prefer to ignore it. Second, we discuss different timings of information release, i.e., a disclosure contract offered to the agent after the principal announced the result of IT_P , and a concealment contract where the agent exerts effort before IT_P is checked. We find that concealment is superior whenever the quality of IT_P is sufficiently low. Then, IT_P is almost worthless under a disclosure contract, while it can still be exploited to reduce the agent's information rent under concealment. If the quality of IT_P improves, disclosure can be superior as it allows to adjust the agent's effort to the updated expected quality of the project. However, even for a highly informative IT_P , concealment can be superior as it mitigates the adverse selection problem.     

发展中国家普遍服务义务的经济分析

本文构建一个简单的非对称信息模型,分析发展中国家特定的普遍服务问题。在模型中,政府与垄断企业的非对称信息产生于在农村提供服务的边际成本,最优普遍服务政策可以用两种规制手段即资费和网络投资来实现。本文对区别定价和统一定价两种情形进行了对比分析,得出的结论是：在实施区别定价时,与完全信息相比,不完全信息将提高农村地区的资费水平,并且减小相应的网络覆盖面积;而在实施统一定价时,农村地区的定价可能降低,但这是以网络覆盖面积的减小为代价。模型结果还表明,合谋的成胁会弱化企业的激励。有意思的是,在这两种定价机制下,企业和纳税人这两种不同的利益集团均有同规制者合谋的动机。实际上,纳税人利益集团的存在,强化了规制者和企业之间的防止合谋约束,并且为了减少规制者同纳税人利益集团的合谋收益,即使规制者具有高成本信息,也会使配置结果扭曲。     

Monitoring and collusion with 'soft' information

In the standard principal-supervisor-agent model with collusion,Tirole (1986) shows that employing a supervisor is profitablefor the principal if the supervisor's signal of the agent'scost of production is 'hard' (i.e., verifiable but hideable).Anecdotal evidence suggests that information is sometimes 'soft'(i.e., unverifiable). We show that, in fact, it is profitableto employ a supervisor when information is 'soft' even thoughthe three parties can collude. Therefore, standard applicationsof the principal-supervisor-agent model to regulation and auditinghave more scope than previously thought.     

Endogenous rationing,price dispersion and collusion in capacity constrained supergames

This paper examines the feasibility of collusion in capacity constrained duopoly supergames. In each period firms simultaneously set a price–quantity pair specifying the price for the period and the maximum quantity the firm is willing to sell at this price. Under price–quantity competition firms are able to ration their output below capacity. For a wide range of capacity pairs, the equilibrium path providing the smaller firm with its highest stationary perfect equilibrium payoff requires that it undercut its rival’s price and ration demand. Furthermore, for some capacities and discount factors supporting security level punishments, price shading and rationing arise everywhere on the set of stationary perfect equilibrium paths yielding (constrained) Pareto optimal payoffs. That is, price shading may not only be consistent with optimal collusion, it may be a requirement of optimal collusion.     

Mechanism design with collusive supervision

We analyze an adverse selection environment with third party supervision. The supervisor is partly informed of the agent's type. The supervisor and the agent collude while interacting with the principal. Contracting with the agent directly and ignoring the presence of the supervisor constitutes the no-supervision benchmark. We show that delegating to the supervisor reduces the principal's payoff compared to the no-supervision benchmark under a standard condition on the distribution of the agent's types. In contrast, if the principal contracts with both the agent and the supervisor, there exists a mechanism that improves the principal's payoff over the no-supervision payoff.     

Collusion, Delegation and Supervision with Soft Information

This paper shows that supervision with soft information is valuable whenever supervisors and supervisees collude under asymmetric information and proceeds then to derive an Equivalence Principle between organizational forms of supervisory and productive activities. We consider an organization with an agent privately informed on his productivity and a risk averse supervisor getting signals on the agent's type. In a centralized organization, the principal can communicate and contract with both the supervisor and the agent. However, these two agents can collude against the principal. In a decentralized organization, the principal only communicates and contracts with the supervisor who in turn sub-contracts with the agent. We show that the two organizations achieve the same outcome. We discuss this equivalence and provide various comparative statics results to assess the efficiency of supervisory structures.     

Multistage Contracting with Applications to R&D and Insurance Policies

An agent undertakes a nonobservable first‐stage effort. The principal observes whether the effort results in a successful project or not. If the project succeeds, only the firm observes its interim quality, and can further improve it with a nonobservable second‐stage effort. If the agent accepts penalties when the first‐stage fails, moral hazard and asymmetric information do not prevent the principal from implementing her first‐best outcome. However, if the agent is bounded by the maximum loss he can bear when the first‐stage fails (limited liability), the principal induces the agent to exert a first‐stage effort below the first‐best level and a second‐stage effort above the first‐best level when the interim quality of his project is low. This distortion in efforts implies that the ex post rent left to the agent with a project of high interim quality is above the first‐best level. This provides a rationale for the optimality of expanding the use of the “carrot” (second‐stage rent) when the use of the “stick” (first‐stage penalty) is restricted. Implications of the theory for R&D, bank, job, and insurance contracts are discussed.     

HOW TO DESIGN INFRASTRUCTURE CONTRACTS IN A WARMING WORLD: A CRITICAL APPRAISAL OF PUBLIC–PRIVATE PARTNERSHIPS*

We analyze how long‐term uncertainty, for example, regarding future climate conditions, affects the design of concession contracts and organizational forms in a principal–agent context, with dynamic moral hazard, limited liability, and irreversibility constraints. The prospect of future, uncertain productivity shocks on the returns on the firm's effort creates an option value of delaying efforts, a course that exacerbates agency costs. Contracts and organizational forms are drafted to control this cost of delegated flexibility. The possibility for the agent to delay investment in response to uncertainty and irreversibility also elicits preference for unbundling different stages of the project through short‐term contracts. Our analysis is relevant to infrastructure sectors that are sensitive to changing weather conditions and sheds a pessimistic light on the relevance of public–private partnerships in this context.     

Fairness and Incentives in a Multi‐task Principal–Agent Model

This paper reports on a two‐task principal–agent experiment in which only one task is contractible. The principal can either offer a piece‐rate contract or a (voluntary) bonus to the agent. Bonus contracts strongly outperform piece‐rate contracts. Many principals reward high effort on both tasks with substantial bonuses. Agents anticipate this and provide high effort on both tasks. In contrast, almost all agents with a piece‐rate contract focus on the first task and disregard the second. Principals understand this and predominantly offer bonus contracts. This behavior contradicts the self‐interest theory but is consistent with theories of fairness.     

Optimal incentive schemes: Existence and characterization

A set of conditions under which the principal—agent problem admits solutions is given, and conditions characterizing such solutions are defined. As a consequence it is shown that ‘joint-risk-aversion’ leads to optimal contracts which are continuous.     

Does R&D cooperation facilitate price collusion? An experiment

We examine in a laboratory experiment whether R&D cooperation facilitates tacit price collusion. For two scenarios of technological spillovers, a baseline treatment without binding contract possibilities and a contract treatment where it is possible to credibly commit to an R&D contract, are run. We find that the degree of price collusion in the contract treatments is significantly higher in periods where R&D contracts are made than in periods without contracts, and than in the baseline treatments.