Corruption and supervision costs in hierarchies

We study the problem of organizing three agents in a hierarchical monitoring structure and designing a corresponding incentive system to minimize the cost of implementing a target level of corruption. We show that the possibility of collusion may prevent the implementation of anything less than full corruption. In relatively flat hierarchies, economies of scale in monitoring reduce implementation costs but may increase the risk of collusion. We contrast the performance of the hierarchy where one supervisor monitors two subordinates with the supervision chain, whose upper part is shown to display a higher risk of collusion than its lower part. J. Comp. Econom., April 1996, 22(2), pp. 99-118. Bilkent University, Bilkent, Ankara, Turkey 06533. © 1996 Academic Press, Inc