Social Relations and Monitoring in the Workplace:

Social relations in uence managerial decisions. This thesis develops a principal- supervisor-agent model of moral hazard. Agent and supervisor have social rela- tions with each other. The principal does not adequately account for the real incentive distortions that the social relation can entail. Agents can be of high or low type. The supervisor can misrepresent the type of a worker to the prin- cipal in order to retain a worker he likes or lay o a worker he dislikes. When a high-type worker is red or a low-type worker is retained due to the evalu- ation of the supervisor, this is has negative consequences for the principal. In extensions of the basic model, the principal can randomly learn the truthfulness of the supervisor's evaluation and a third type of agent, an agent who can steal from the rm but has to collude with the supervisor in order to steal success- fully, is introduced. The principal's random learning of type makes it more likely that the supervisor's evaluation is truthful. The employee's collusion constraint is easiest to satisfy with positive social relations and is harder to satisfy with neutral or negative social relations. This suggests that, in certain situations, it may be benecial to the principal when his employees dislike each other.