CORRUPTION AND SUPERVISION COSTS IN HIERARCHIES

We study the problem of organizing three agents in a hierarchical moni toring structure and designing a corresponding incentive system to min imize the cost of implementing a target level of corruption. We show t hat the possibility of collusion may prevent the implementation of any thing less than full corruption. In relatively flat hierarchies, econo mies of scale in monitoring reduce implementation costs but may increa se the risk of collusion. We contrast the performance of the hierarchy where one supervisor monitors two subordinates with the supervision c hain, whose upper part is shown to display a higher risk of collusion than its lower part. (C) 1996 Academic Press, Inc.