- The Threat of Corruption and the Optimal Supervisory Task. 2015. With Alessandro De Chiara (CEU)
Modern organizations have boosted their productivity by extensively relying on information and communication technologies (ICT). However, employers are increasingly concerned about the potential misuse of ICT that employees may undertake for personal reasons: Surfing the internet, checking social media or personal e-mails, and shopping online are among the main non-work related activities pursued by employees in the office which reduce on-the job focus. Furthermore, employees’ internet use for personal reasons can cause bandwidth and storage shortages, especially because of file sharing and audio/video streaming. In some instances, it can even expose the organization to potential lawsuits. Finally, employees can readily divulge confidential information causing the loss of the firm’s competitive edge over its competitors.
Hiring a supervisor to inspect and report on the employees’ behavior has the apparent benefits of preventing wrongdoing and decreasing the cost of incentives. An employee may refrain from both improperly using the resources of the firm and shirking, fearing that a supervisor may catch him red-handed. In modern firms, however, these benefits may be dampened by the cost of performing an inspection and the inefficiencies stemming from internal corruption. Even though new technologies allow to record and store evidence on the employees’ behaviors in a number of relatively inexpensive ways (e.g. video surveillance, software which allows to track activities occurring on an employee’s computer, such as usage of applications and e-mail content), the inspection itself may be very costly and time-consuming (e.g. engaging a supervisor to watch the video or to check the e-mails and the on-line activities that the employees have undertaken). The problem of internal corruption arises when the evidence on an agent’s behavior can be manipulated and the agent is either fined or rewarded on the basis of the supervisor’s report.
In this paper we show that the relative relevance of these two concerns affects a crucial internal decision that organizations must take, namely the timing at which an inspection should occur. In general, an inspection of the recorded evidence can take place before or after the outcome of the organization is observed and we say that the supervisor is assigned a monitoring task in the former case and an auditing task in the latter case. We find that monitoring is more effective than auditing in tackling corruption as the principal can request the supervisor’s report before the outcome realization. This allows the principal to design a compensation scheme which prevents corruption at a lower cost by taking advantage of the supervisor’s uncertainty about the state of nature. In contrast, auditing reduces the cost of supervision as it allows the principal to defer the choice of inspecting the agent’s performance until after the outcome of the organization is observed. Whenever the outcome realization suffices to determine the agent’s compensation, the principal will decide not to hire the supervisor thereby saving her salary. Thus the benefits of auditing stem from its being ex-ante random.