Analysis of Hidden Gaming in a Three-Level Hierarchy

Abstract

The principal agent model is a convenient tool for analyzing the internal structure of organizations. The design of optimal contracts by a principal to mitigate the moral hazard or adverse selection problems embedded in his relationship with one agent (or several agents of the same type) is now wellunderstood.l However, this work is restricted to two-level hierarchies. The economic analysis of more complex organizations is still very limited. There exists an old literature studying the optimal design of communication channels, leaving aside incentive questions. Recent work includes Cremer (1979), Geanakoplos and Milgrom on hierarchical structures, Sah and Stiglitz, Green and Laffont (1986), and Marschak and Reichelstein on the comparison of hierarchical structures and more general networks. Multilayers of principal agent relationships with pure moral hazard have been considered (Williamson, Mirrlees, Calvo and Wellisz). In this work, as in Stiglitz, which is concerned with adverse selection, coalitional behavior was not considered