Mechanism Design with Collusive Supervision

We analyze an adverse selection environment with third party supervision. We assume that the "supervisor" and the "agent" can collude while interacting with the "principal". As long as the supervisor is symmetrically informed with the agent, the former's existence does not improve the principal's rent extraction. This is due to the "coalitional efficiency" between the supervisor and the agent. However, asymmetric information between these two parties can cause a "collusion failure", which undermines the coalitional efficiency. In that case, we show that the principal can increase his payoff, by manipulating the agent's opportunity cost for colluding with the supervisor. Delegating the authority to contract with the agent to the supervisor is not successful in enhancing the principal's payoff, since the principal loses the instrument to manipulate the opportunity cost of collusion under this organizational form. The increase in the principal's rent extraction does not necessarily imply an overall welfare improvement. Social welfare may decline with the introduction of the supervisor.Collusion, supervision, mechanism design

Mechanism design with collusive supervision: a three-tier agency model with a continuum of types

We apply the "Monotone Comparative Statics" method ala Topkis (1978), Edlin and Shannon (1998), and Milgrom and Segal (2002)'s generalized envelope theorem to the three-tier agency model with hidden information and collusion ala Tirole (1986, 1992), thereby provide a framework that can address the issues treated in the existing literature, e.g., Kofman and Lawarree (1993)''s auditing application, in a much simpler fashion. In addition to such a technical contribution, the paper derives some clear and robust implication applicable to corporate governance reform (Propositions 1 (2) and 3).

Supervisory Efficiency and Collusion in a Multiple-Agent Hierarchy

We analyze a principal-supervisor-two-agent hierarchy with inefficient supervision. The su-pervisor may collects a wrong signal on each agent’s unobservable effort level. When reportingto the principal, the supervisor can collude with one or both agents to manipulate the signalin exchange for a bribe. In contract design, we identify a new trade-off between the loss fromsupervisor-agent collusion and the risk from inefficient supervision: Although allowing collu-sion makes shirking more attractive to the agents, it brings in a benefit because it can “correct”an incorrect negative signal when the agent has exerted effort. Such collusive supervision savesrisk premiums that the principal has to pay for incentive provision. We characterize the princi-pal’s optimal contract choice among no-supervision, collusion-proof, and collusive-supervisioncontracts. We show that the collusive-supervision contract dominates when the supervisory ef-ficiency is at an intermediate level

Bargaining and Collusion in a Regulatory Model

We consider the regulation of a monopolistic market when the prin- cipal delegates to a regulatory agency two tasks: the supervision of the firm's unknown costs and the arrangement of a pricing mechanism. As usual, the agency may have an incentive to hide information from the principal to share the informative rent with the firm. The novelty of this paper is that both the regulatory mechanism and the side con- tracting between the agency and the firm are modelled as a bargaining process. This negotiation between the regulator and the monopoly induces a radical change in the extraprofit from private information, which is now equal to the standard informational rent weighted by the agency’ bargaining power. This in turn a¤ects the collusive stage, in particular the firm has the greatest incentive to collude when fac- ing an agency with the same bargaining power. Then, we focus on the optimal organizational responses to the possibility of collusion. In our setting, where incompleteness of contracts prevents the design of a screening mechanism between the agency’ types and thus Tirole’ equivalence principle does not apply, we prove that the stronger the agency in the negotiation process, the greater the incentives for the principal to tolerate collusion in equilibrium.regulation, bargaining, collusion.

Optimal Collusion-Proof Auctions

We study an optimal collusion-proof auction in an environment where subsets of bidders may collude not just on their bids but also on their participation. Despite their ability to collude on participation, informational asymmetry facing the potential colluders can be exploited significantly to weaken their collusive power. The second-best auction --- i.e., the optimal auction in a collusion-free environment --- can be made collusion-proof, if at least one bidder is not collusive, or there are multiple bidding cartels, or the second-best outcome involves a nontrivial probability of the object not being sold. In case the second-best outcome is not weak collusion-proof implementable, we characterize an optimal collusion-proof auction. This auction involves nontrivial exclusion of collusive bidders --- i.e., the object is not sold to any collusive bidder with positive probability.

Bargaining and Collusion in a Regulatory Model

Within a standard three-tier regulatory model, a benevolent prin- cipal delegates to a regulatory agency two tasks: the supervision of the …rms (two-type) costs and the arrangement of a pricing mecha- nism. The agency may have an incentive to manipulate information to the principal to share the gains of collusion with the …rm. The novelty of this paper is that both the regulatory mechanism and the side contracting between the agency and the …rm are modelled as a bargaining process. While as usual the ine¢ cient …rm does not have any interest in cost manipulation, we …nd that the e¢ cient …rm has an incentive to collude only if the agencys bargaining power is high enough, and the total gains of collusion are now lower than those the two partners would appropriate if the agency could make a take-it-or- leave-it o¤er. Then, we focus on the optimal institutional responses to the possibility of collusion. In our setting, where the incomplete- ness of contracts prevents the principal from designing of a screening mechanism and thus Tiroles equivalence principle does not apply, we show how the playersbargaining powers crucially drive the optimal response to collusion.bargaining, collusion, regulation

Sweet Lemons: Mitigating Collusion in Organizations

This paper shows that the possibility of collusion between an agent and a supervisor imposes no restrictions on the set of implementable social choice functions (SCF) and associated payoff vectors. Any SCF and any payoff profile that are implementable if the supervisor′s information was public is also implementable when this information is private and collusion is possible. To implement a given SCF we propose a one-sided mechanism that endogenously creates private information for the supervisor vis-à-vis the agent, and conditions both players′ payoffs on this endogenous information. We show that in such a mechanism all collusive side-bargaining fails, similar to the trade failure in Akerlof′s (1970) car market and in models of bilateral trade

Collusion and Delegation under Information Control

This paper studies how information control affects incentives for collusion and optimal organizational structures in principal-supervisor-agent relationships. I consider a model in which the principal designs the supervisor's signal on the productive agent's private information and the supervisor and agent may collude. I show that the principal optimally delegates the interaction with the agent to the supervisor if either the supervisor's budget is large or the value of production is small. The principal prefers direct communication with the supervisor and agent if the supervisor's budget is sufficiently small and the value of production is high