In the standard principal-supervisor-agent model with collusion, Tirole (1986) shows that employing a supervisor is profitable for the principal if the supervisor’s signal of the agent’s cost 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 profitable to employ a supervisor when information is “soft ” even though the three parties can collude. Therefore, standard applications of the principal-supervisor-agent model to regulation and auditing have more scope than previously thought. 1
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