Collusion and Renegotiation in a Principal-Supervisor-Agent- Relationship (REVISION)

This paper describes a principal-agent relationship with a supervisor who has information about the agent. The agent and the supervisor have the possibility to collude and misinform the principal. In accordance with the existing literature there exists an optimal contract which excludes collusion in equilibrium. The optimal contract exhibits, however, ex-post inefficient and creates scope for renegotiation. If a renegotiation-stage is incorporated in the game then for some parameter constellations the optimal contract is a contract which necessarily induces collusion. The paper thus shows that the principal's behavior toward ex-post inefficiencies may determine whether collusion occurs in equilibrium.