Monitoring with Collusion and the Value of Information

Abstract

In a principal-supervisor-agent relationship with collusion, I rank the principal’s preference over the quality of the supervisor’s information. In the presence of imperfect signal and output distortions, the principal does better with hard-butnon-forgeable information than with soft information. Only in the limit case of accurate signal (i.e., the supervisor may observe either the true type or nothing) the principal with soft information is as well off as with hard information even under output distortions (as in Baliga). Nevertheless, distortions are needed for the creation of collusion stakes through differential information rents when the supervisor’s signal is noisy. The conditions under which the supervisor with soft information is still valuable for the principal are, first, that the supervisor’s signal’s must exceed some lower treshold of noise and, second, that side transfers between the agent and the supervisor must be inefficient.