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The Threat of Corruption and the Optimal Supervisory Task

Author

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  • Alessandro De Chiara
  • Luca Livio
Abstract
In this paper we investigate the task the supervisor should be optimally charged with in an agency modelin which the principal faces corruption concerns. We highlight a fundamental tradeoff between monitoringthe agent’s effort choice and auditing it ex-post. Monitoring proves more effective in tackling corruptionsince the supervisor sends the report before the profit realization. By taking advantage of the supervisor’suncertainty about the state of nature, the principal can design a compensation scheme which prevents allforms of corruption at a lower cost. Conversely auditing reduces the cost of supervision as the principalhires the supervisor only if the profit does not convey enough information about the compensation due tothe agent. We show that the ultimate choice between monitoring and auditing depends on the supervisor’sability to falsify information and the cost of performing an inspection.

Suggested Citation

  • Alessandro De Chiara & Luca Livio, 2015. "The Threat of Corruption and the Optimal Supervisory Task," Working Papers ECARES ECARES 2015-37, ULB -- Universite Libre de Bruxelles.
    • Handle: RePEc:eca:wpaper:2013/219175
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    References listed on IDEAS

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    Cited by:

    1. De Chiara, Alessandro & Livio, Luca & Ponce, Jorge, 2018. "Flexible and mandatory banking supervision," Journal of Financial Stability, Elsevier, vol. 34(C), pages 86-104.
    2. Pasquale Ruggiero & Riccardo Mussari, 2024. "The definition of corporate corruption prevention during the last decade: Bibliometrics and content data for the future research agenda," Business Strategy and the Environment, Wiley Blackwell, vol. 33(1), pages 43-54, January.
    3. Marchegiani, Lucia & Reggiani, Tommaso & Rizzolli, Matteo, 2016. "Loss averse agents and lenient supervisors in performance appraisal," Journal of Economic Behavior & Organization, Elsevier, vol. 131(PA), pages 183-197.
    4. De Chiara, Alessandro & Livio, Luca, 2017. "The threat of corruption and the optimal supervisory task," Journal of Economic Behavior & Organization, Elsevier, vol. 133(C), pages 172-186.
    5. Rodivilov, Alexander, 2022. "Monitoring innovation," Games and Economic Behavior, Elsevier, vol. 135(C), pages 297-326.
    6. Aaron Finkle & Dongsoo Shin, 2020. "Obstructive monitoring," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 29(4), pages 873-891, October.
    7. De Chiara, Alessandro & Manna, Ester, 2022. "Corruption, regulation, and investment incentives," European Economic Review, Elsevier, vol. 142(C).

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    More about this item

    Keywords

    auditing; collusion; corruption; extortion; monitoring; supervision;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure

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