Controlling corruption in hierarchies

We re-examine alternative hierarchical designs for controlling corruption as studied by Bac (J. Comp. Econom. 22, 2:99-118), since his formulation of the principal's problem was incomplete. In a basic hierarchy, while collusion between a supervisor and his subordinate agent may prevent implementation of high corruption outcomes, the principal would be able to induce relatively low corruption outcomes. In a two-level decentralized supervision chain, internal collusion in the upper part always induces collusion at the bottom but not vice-versa. For nonincreasing returns-to-scale monitoring technologies, the principal prefers a decentralized hierarchy to a centralized hierarchy. (C) 1997 Academic Press.