Hierarchies, incentives and collusion in a model of enforcement

This paper considers a model of enforcement with corruptible supervisor in an agency framework. We examine how the supervisor’s choice of effort and honesty would be influenced by various incentive schemes (penalty and reward) and the organizational structure. We consider both vertical hierarchies (corrupt supervisor monitoring another) and horizontal structures where several supervisors monitor the agent and compete for the reward or the bribe income. The latter structure tend to induce less corruption but need not welfare dominate the vertical hierarchies. The organizational structure matters most when there are constraints on rewards and penalties.