COLLUSION AND RENEGOTIATION IN A PRINCIPAL-SUPERVISOR-AGENT RELATIONSHIP

We describe a principal-supervisor-agent relationship in which agent a nd supervisor may collude. To prevent collusion, the principal may con tract on a noisy signal which is correlated with the occurrence of col lusion. When the signal is informative enough, the principal uses it a nd no collusion occurs in equilibrium. These contracts, however, are e x post inefficient and are only optimal if the principal can commit no t to renegotiate. With renegotiation it is never optimal for the princ ipal to prevent collusion and, at the same time, condition contracts o n the signal. In fact, when the signal is informative enough collusion occurs in equilibrium.