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Contracts under Wage Compression: A Case of Beneficial Collusion

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  • Dongsoo Shin

    ()
    (Department of Economics, Leavey School of Business, Santa Clara University)

Abstract

This paper considers a principal-agent model with adverse selection and limited wage discrimination. Under wage compression, an agent may have an incentive to free ride on other agents by manipulating his private information. When collusion among the agents is not possible, the principal distorts the output schedule to reduce information rent associated with the free-riding opportunity. Under collusion, however, the principal can reduce the information rent by inducing side contracts among the agents, thus partly removing the distortion in the output schedule. We show that side contracts among the agents take place in equilibrium and that the prospect of collusion is beneficial.

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Bibliographic Info

Article provided by Southern Economic Association in its journal Southern Economic Journal.

Volume (Year): 74 (2007)
Issue (Month): 1 (July)
Pages: 143-157

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Handle: RePEc:sej:ancoec:v:74:1:y:2007:p:143-157

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Web page: http://www.southerneconomic.org/
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