Monday, October 17, 2011
Posted by D. Daniel Sokol
Alberto Motta, University of New South Wales writes on Collusion and Selective Supervision.
ABSTRACT: 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.