Monitoring and collusion with "soft" information

In the standard principal-supervisor-agent model with collusion, Tirole (19 86) shows that employing a supervisor is profitable for the principal if th e supervisor's signal of the agent's cost of production is "hard" (i.e., ve rifiable but hideable). Anecdotal evidence suggests that information is som etimes "soft" (i.e., unverifiable). We show that, in fact, it is profitable to employ a supervisor when information is "soft" even though the three pa rties can collude. Therefore, standard applications of the principal-superv isor-agent model to regulation and auditing have more scope than previously thought.