This paper considers the consequences of human morals and unofficial/corrupt activities on the design of public and private institutions. The provision of incentives and the regulation of unofficial activities are two major determinants of the design of institutions. The paper presents a phenomenon-driven model of an institution that simultaneously accounts for some of the complexity of its structure and some of the complexity of the behaviors of its members. Investigating the functioning of a hierarchical multi-layer institution where a principal delegates the monitoring of an agent to a supervisor, we notably show that the optimal contracts and policy to deal with unofficial activities depend on the supervisor's morals. The supervisor may be trustworthy or not. An untrustworthy supervisor harasses the agent or engages in corruption with her if it is advantageous for him to do so, whereas a trustworthy supervisor systematically avoids unofficial activities. We show how harassment discourages agents and may increase the cost of incentivizing them. The analysis determines when an institution optimally tolerates unofficial activities, the condition under which it offers a low-powered incentive contract to its agents, and who benefits from unofficial activities. In addition to these results, we prove that the poorer the supervision technology of an institution, the more harassment is tolerated.