"A theory of abuse of authority in hierarchies," International Journal of Industrial Organization Volume 20, Issue 8, October 2002, pages 1143-66.
JEL codes: D82, L20, M12
Keywords: moral hazard, hierarchy, abuse of authority, collusion, incomplete contracts
Abstract: This paper investigates a principal-supervisor-agent relationship with moral hazard in which the supervisor can engage in both collusion and abuse of authority. Collusion occurs when the agent bribes the supervisor to conceal information that is unfavorable to her from the principal. By contrast, abuse of authority occurs when the supervisor threatens the agent with concealing information that is favorable to her unless she pays him a tribute. We show that abuse of authority is more harmful to the organization than collusion. Paradoxically, the presence of abuse of authority benefits the agent (the potential victim) and not the supervisor. The analysis also reveals that the presence of abuse of authority expands the range of contractual incompleteness.