Mechanism design with collusive supervision: a three-tier agency model with a continuum of types

We apply the "Monotone Comparative Statics" method ala Topkis (1978), Edlin and Shannon (1998), and Milgrom and Segal (2002)'s generalized envelope theorem to the three-tier agency model with hidden information and collusion ala Tirole (1986, 1992), thereby provide a framework that can address the issues treated in the existing literature, e.g., Kofman and Lawarree (1993)''s auditing application, in a much simpler fashion. In addition to such a technical contribution, the paper derives some clear and robust implication applicable to corporate governance reform (Propositions 1 (2) and 3).