An economic theory of collusion, blackmail and whistle-blowing in organisations

This thesis examines informal and corruptive activities agents may pursue within organisations. Chapter 1 is a brief introduction to the general theme and the related literature. Chapter 2 develops a simple theory of non-monetary collusion, where agents collude by exchanging favours. It examines the optimal use of supervisory information in a simple hierarchy under potential collusion. It is shown that when only the supervisor's information about the agent is used, collusion does not arise, since favours can not be exchanged. Secondly, it is analysed whether the agent's information about his superior should be used. In this case collusion is possible, and there is an interesting trade-off between the benefits of using additional information and the costs of collusion. It is then shown that sometimes the principal may be better off when using less than all available information. Chapter 3 considers task assignment and whistle-blowing as measures a principal may use to break collusion. The principal's response to potential collusion is to allocate less time to monitoring, and he breaks collusion with money. It is shown that the principal may also break collusion by hiring a third worker, and the decision how to break collusion optimally is endogenously determined. Breaking collusion by task assignment is costly, and therefore we consider whistle-blowing as a collusion breaking device. It provides the principal strictly higher welfare than the collusion-proof solution. It is also shown that under reasonable conditions, the collusion-free outcome will be achieved with no further cost. Chapter 4 develops a model of blackmail, where a piece of information an agent prefers to keep private may facilitate blackmail when another agent, namely a blackmailer, threatens to reveal that information. The crucial feature of the blackmail game is the commitment problem from the blackmailer's side. The blackmailer can not commit not to come back in future to demand more despite the payments received in the past. The chapter outlines conditions under which successful extortion may arise, and shows that there is a unique Markov Perfect Equilibrium, which gives a precise prediction how much money the blackmailer is able to extort from the victim. It is also shown that the blackmailer receives a blackmail premium that compensates the blackmailer for not taking money from the victim and revealing information anyway.