Preventing abuse of authority in hierarchies

This paper investigates a principal-supervisor-agent relationship with moral hazard in which the supervisor may engage in both collusion and abuse of authority. Collusion occurs when the agent bribes the supervisor to conceal information that is unfavourable to her from the principal. By contrast, abuse of authority occurs when the supervisor threatens the agent with concealing information that is favourable 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 simplicity. (C) 2002 Elsevier Science B.V. All rights reserved.