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Implicit Collusion in Hierarchical Relationships

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  • Joachim Wessels
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    Abstract

    We reconsider Tirole's framework of a three-tier principal-agent problem, in which he has shown that an incentive problem is caused by the possibility of monetary side payments between the agent and the middle -level supervisor. We consider the case where monetary transfers are not possible, but a different, implicit kind of collusion arises because the supervisor cares about the utility enjoyed by his subordinate. This approach avoids the crucial problem of how an explicit side contract could be enforced. We show that the difference in the cause of collusion leads to a difference in the way in which collusion is prevented: the agent's incentive scheme is used to give incentives to the supervisor. An interdependence between incentive schemes thus follows from utility interdependence.

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    File URL: http://www.wiwi.uni-bonn.de/bgsepapers/bonsfa/bonsfa455.ps
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    Bibliographic Info

    Paper provided by University of Bonn, Germany in its series Discussion Paper Serie A with number 455.

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    Date of creation: Mar 1993
    Date of revision: Oct 1994
    Handle: RePEc:bon:bonsfa:455

    Contact details of provider:
    Postal: Bonn Graduate School of Economics, University of Bonn, Adenauerallee 24 - 26, 53113 Bonn, Germany
    Fax: +49 228 73 6884
    Web page: http://www.bgse.uni-bonn.de

    Related research

    Keywords: collusion; hierarchy; principal/agent theory; utility interdependence.;

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    Cited by:
    1. R. Färe & A. Shorrocks & A. Giovannini & P. Stemp & Kersten Kellermann & J. Wessels, 1994. "Book reviews," Journal of Economics, Springer, vol. 60(1), pages 109-124, February.

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