Bribery vs. Extortion: Allowing the Lesser of two Evils

Rewards to prevent supervisors from accepting bribes create incentives for extortion. This raises the question whether a supervisor who can engage in bribery and extortion can still be useful in providing incentives. By highlighting the role of team work in forging information, we present a notion of soft information that makes supervision valuable. We show that a fear of inducing extortion may make it optimal to allow bribery, but extortion is never tolerated. Even though both increase incentive cost, extortion penalizes the agent after “good behavior”, while bribery penalizes the agent after “bad behavior”. Since bribery occurs when a violation is detected, the bribe is a penalty for “bad behavior”, and helps somewhat in providing incentive. We find that extortion is a more serious issue when incentives are primarily based on soft information, when the agent has a greater bargaining power while negotiating an illegal payment, or when the agent has weaker outside opportunities. Our analysis provides explanations why extortion may be less of a problem in developed countries.monitoring, corruption, collusion, bribery, extortion, framing

On the Information Gathering Role of Firm-Sponsored Training for New Hires by

According to Becker’s human capital theory, employers tend to under-invest in general training relative to specific training as it increases their existing employees ’ outside opportunities. We show that this is not necessarily true if training has an information gathering function that allows an agent to learn his skills. An example is the training of new hires. When training creates an information asymmetry between the principal and the agent, the principal may over-invest in general training relative to specific training. General training helps the principal reduce the incentive problem inside the firm. Becker’s result of under-investment in general training may not hold when training In many situations, an agent who engages in certain activities sponsored by a principal can gather critical information as a byproduct. An example is the training for new hires. As new hires are often inexperienced, they may not know their abilities or skills yet. By participating in a training program sponsored by the employer (principal)

Organizational Flexibility and Cooperative Task Allocation among Agents

We compare rigid and flexible organizations when side contracting among agents is possible. Within a rigid organization, each agent can produce only one component of the final product, whereas within a flexible organization, the agents can reallocate their tasks during the production period. In our model, the principal can only observe the joint output produced by the agents. Our analysis reveals that within a flexible organization, side transfers are exchanged between the agents in equilibrium, and not only an efficient agent but also an inefficient agent may acquire a rent. Yet, the principal's payoff is higher when the organization is flexible, as the agents' rent-seeking behavior generates a more efficient production technology.

On the Information-Gathering Role of Firm-Sponsored Training for New Hires

According to Becker´s human-capital theory, employers tend to underinvest in general training relative to specific training because it increases their existing employees´ outside opportunities. We show that this is not necessarily true if training has an information-gathering function that allows an agent to learn his skills. An example is the training of new hires. When training creates an information asymmetry between the principal and the agent, the principal may overinvest in general training relative to specific training. General training helps the principal reduce the incentive problem inside the firm. Becker´s result of underinvestment in general training may not hold when training creates asymmetric information.