Collusion, Delegation and Supervision with Soft Information

Abstract
This paper derives an Equivalence Principle between organizational forms of supervisory and productive activities. We consider an organization with an agent privately informed on his productivity and a risk averse supervisor getting signals on the agent’s type. In a centralized organization, the principal can communicate and contract with both the supervisor and the agent. However, these two agents can collude against the rincipal. In a decentralized organization, the principal only communicates and contracts with the supervisor who in turn sub-contracts with the agent. We show that the two organizations achieve the same outcome. We discuss this equivalence and provide various comparative statics results to assess the e¢ciency of supervisory structures.
Key Words: Supervision, soft information, collusion, delegation.
Jel Classification: D82, G14, G32, L51