Abuse of authority and collusion in organizations

I investigate an agency relationship with moral hazard where a principal relies on a supervisor to obtain verifiable information about an agent's output. The supervisor's discretionary power allows him to engage in unofficial activities, namely collusion and abuse of authority. Collusion occurs when the supervisor receives a bribe from the agent to conceal information whereas abuse of authority occurs when instead the supervisor asks the agent for a tribute to reveal information. I characterize the optimal incentive contracts in this environment and study how collusion and abuse of authority interact. Compared with the presence of a single form of unofficial activity, the presence of multiple forms of unofficial activity is never harmless and is more severely harmful. I also identify the condition under which the presence of multiple forms of unofficial activity entails cost super-additivity.