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.

This thesis consists of three self-contained essays dealing with different aspects of macroeconomics and political Economy. The Relative Price of Investment Goods and Sectoral Contract Dependence I develop a quantitative model to explain the relationship between TFPs at the aggregate and sector levels and contracting institutions across countries. The incomplete contract enforcement induces distortions in the production process which come from the “hold up” problem between a final goods firm and its suppliers. Because investment goods sector is more contract dependent, its productivity suffers more from the distortion. In turn, countries endowed with weaker contract enforcement institutions face higher relative prices of investment goods. A Ricardian Model of the Labor Market with Directed Search I analyze how search friction affects the allocation in a Ricardian model of the labor market. The equilibrium shows that the matching pattern is partially mixed: Some tasks are only performed by skilled workers; some are only performed by unskilled workers; the remaining tasks are performed by both skilled and unskilled workers. The mixed matching pattern implies a mismatch in equilibrium. It turns out that the reason for the mismatch has its roots in search friction. In addition, I show labor market institutions have interesting implications for the unemployment rate and mismatch. A Dynamic Analysis of the Free-rider Problem I argue that special interest groups overcome their free-rider problem thanks to distorted government policy. As policy confers monopoly privileges on a group, it can also preserve and promote group’s organization. The key to sustaining the organization of the group is a dynamic incentive: when distorted policy generates rents for a group, each member of the group wish to make contributions not just to raise their rents today; they want to sustain their cooperation so that they will be able to influence policy in the future.