Dundee Discussion Papers in Economics 067: Hierarchies, Incentives And Collusion In Model Of Enforcement

This paper considers a model of enforcement with corruptible enforcers in a principal-supervisor-agent framework. We look at how different reward and penalty schemes lead to different outcomes (agent's compliance) by affecting the supervisor's choice of effort and honesty. It is shown that the organizational structure of the agency also influences the effort-honesty choice of the supervisors. A vertical hierarchical structure (with. corrupt supervisors monitoring another corrupt supervisor) can be optimal in certain cases. Likewise, an arrangement where more than one supervisor monitor the agent, can also be optimal. The organizational issues assume importance when there are constraints on the size of rewards and penalties
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