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A theory of supervision with endogenous transaction costs

Faure-Grimaud, Antoine and Laffont, Jean-Jacques and Martimort, David (1998) A theory of supervision with endogenous transaction costs. TE, 356. Suntory and Toyota International Centres for Economics and Related Disciplines, London School of Economics and Political Science, London, UK.

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Identification Number: 356

Abstract

We propose a theory of supervision with endogenous transaction costs. A principal delegates part of his authority to a supervisor who can acquire soft information about an agent's productivity. If the supervisor were risk-neutral, the principal would simply make the better informed supervisor residual claimant for the hierarchy's profit. Under risk-aversion, the optimal contract trades-off the supervisor's incentives to reveal his information with an insurance motive. This contract can be identified with the one obtained in a simple hard information model of hierarchical collusion with exogenous transaction costs. Now, transaction costs are endogenous and depend on the collusion stake, the accuracy of the supervisory technology and the supervisor's degree of risk-aversion. We then discuss various implications of the model for the design and management of organisations.

Item Type: Monograph (Discussion Paper)
Official URL: http://sticerd.lse.ac.uk
Additional Information: © 1998 the authors
Subjects: H Social Sciences > HG Finance
H Social Sciences > HB Economic Theory
Sets: Departments > Accounting and Finance
Collections > Economists Online
Research centres and groups > Suntory and Toyota International Centres for Economics and Related Disciplines (STICERD)
Date Deposited: 14 Jul 2008 10:26
Last Modified: 01 Oct 2010 09:11
URI: http://eprints.lse.ac.uk/id/eprint/19356

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