:  Faure-Grimaud Antoine, Laffont J J, Martimort David
:  A Theory of Supervision with Endogenous Transaction Costs
:  
:  1998
:  
:  A. Faure-Grimaud, J-J. Laffont, D. Martimort. A Theory of Supervision with Endogenous Transaction Costs. preprint. 1998
:  We propose a theory of supervision with endogenous transaction costs.
A principal delegates part of his authority to a supervisor who can
acquire soft information about an agents productivity. If the supervisor
were risk-neutral, the principal would simply make the better informed
supervisor residual claimant for the hierarchys profit. Under riskaversion,
the optimal contract trades-off the supervisors incentives to
reveal his information with an insurance motive. This contract can be
identified with the one obtained in a simple hard information model of
hierarchical collusion with exogenous transaction costs. Now,
transaction costs are endogenous and depend on the collusion stake,
the accuracy of the supervisory technology and the supervisors degree
of risk-aversion. We then discuss various implications of the model for the design and management of organisations.
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