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A theory of supervision with endogenous transaction costs

Faure-Grimaud, Antoine, Laffont, Jean-Jacques and Martimort, David (2000) A theory of supervision with endogenous transaction costs. Annals of Economics and Finance, 1 (2). pp. 231-263. ISSN 1529-7373

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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 organizations.

Item Type: Article
Official URL: http://aeconf.com/
Additional Information: © 2000 Peking University Press
Divisions: Financial Markets Group
STICERD
Subjects: H Social Sciences > HC Economic History and Conditions
H Social Sciences > HG Finance
JEL classification: D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information
G - Financial Economics > G1 - General Financial Markets > G14 - Information and Market Efficiency; Event Studies
G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure
L - Industrial Organization > L5 - Regulation and Industrial Policy > L51 - Economics of Regulation
Sets: Research centres and groups > Financial Markets Group (FMG)
Collections > Economists Online
Research centres and groups > Suntory and Toyota International Centres for Economics and Related Disciplines (STICERD)
Date Deposited: 03 Jul 2008 12:46
Last Modified: 16 Sep 2019 11:48
URI: http://eprints.lse.ac.uk/id/eprint/6385

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