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Risk Averse Supervisors and the Efficiency of Collusion

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Author Info

  • Faure-Grimaud Antoine

    ()
    (London School of Economics and Political Science)

  • Laffont Jean-Jacques

    ()
    (Universite de Toulouse (IDEI-GREMAQ))

  • Martimort David

    ()
    (Universite de Toulouse (IDEI-GREMAQ))

Abstract

This paper studies the efficiency of collusion between supervisors and supervisees. Building on Tirole (1986)'s results that deterring collusion with infinitely risk averse supervisors is impossible, while it is costless to do so under risk neutrality, we develop here a theory of collusion based on a trade-off between the risk premia required by (less extreme) risk attitudes and incentives. This allows us to link the efficiency of collusion to the supervisor's risk aversion and to various parameters characterizing the economic environment in which collusion may take place. We are then able to derive implications for the design of organizations, like determining how the number of tasks/agents per supervisor or the level of competition may impact on the cost of collusion, studying the impact of vertical integration on those same costs, or characterizing the role of uncertainty on side-contracting.

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Bibliographic Info

Article provided by De Gruyter in its journal The B.E. Journal of Theoretical Economics.

Volume (Year): 2 (2003)
Issue (Month): 1 (January)
Pages: 1-32

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Handle: RePEc:bpj:bejtec:v:contributions.2:y:2003:i:1:n:5

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References

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  1. Leonardo Felli & J. Miguel Villas-Boas, 2000. "Renegotiation and Collusion in Organizations," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 9(4), pages 453-483, December.
  2. Baliga, Sandeep, 1999. "Monitoring and Collusion with "Soft" Information," Journal of Law, Economics and Organization, Oxford University Press, vol. 15(2), pages 434-40, July.
  3. Bengt Holmstrom, 1997. "Moral Hazard and Observability," Levine's Working Paper Archive 1205, David K. Levine.
  4. Tirole, Jean, 1986. "Hierarchies and Bureaucracies: On the Role of Collusion in Organizations," Journal of Law, Economics and Organization, Oxford University Press, vol. 2(2), pages 181-214, Fall.
  5. Martimort, David, 1999. "The Life Cycle of Regulatory Agencies: Dynamic Capture and Transaction Costs," Review of Economic Studies, Wiley Blackwell, vol. 66(4), pages 929-47, October.
  6. Bull, Jesse & Watson, Joel, 2000. "Evidence Disclosure and Verifiability," University of California at San Diego, Economics Working Paper Series qt6th0060j, Department of Economics, UC San Diego.
  7. Laffont, J.J. & Martimort, D., 1996. "The Firm as a Multicontact Organization," Papers 95.390, Toulouse - GREMAQ.
  8. Steven Shavell, 1979. "Risk Sharing and Incentives in the Principal and Agent Relationship," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 55-73, Spring.
  9. Jean-Jacques Laffont & Jean Tirole, 1993. "A Theory of Incentives in Procurement and Regulation," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121743.
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Citations

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Cited by:
  1. Yolande Hiriart & David Martimort & Jérôme Pouyet, 2009. "The public management of risk: Separating ex ante and ex post monitors," PSE Working Papers halshs-00566863, HAL.
  2. Fahad Khalil & Jacques Lawarree & Sungho Yun, 2009. "Bribery vs. extortion: allowing the lesser of two evils," Working Papers UWEC-2007-11-P, University of Washington, Department of Economics, revised Jul 2009.
  3. David Martimort & Stephane Straub, 2006. "Privatization and Changes in Corruption Patterns: The Roots of Public Discontent," ESE Discussion Papers 147, Edinburgh School of Economics, University of Edinburgh.
  4. Martimort, David & Straub, Stéphane, 2009. "Infrastructure privatization and changes in corruption patterns: The roots of public discontent," Journal of Development Economics, Elsevier, vol. 90(1), pages 69-84, September.
  5. Scholz, Julia, 2008. "Auswirkungen vertikaler Kollusionsprobleme auf die vertragliche Ausgestaltung von Kreditverkäufen," Discussion Papers in Business Administration 4581, University of Munich, Munich School of Management.
  6. Barlo, Mehmet & Ayca, Ozdogan, 2012. "Team beats collusion," MPRA Paper 37449, University Library of Munich, Germany.

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