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Preventing Collusion through Discretion

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  • Felli, Leonardo
  • Hortala-Vallve, Rafael

Abstract

Large public bureaucracies are commonly regarded as less efficient than modern private corporations. This paper explores how the degree of discretionary power might account for this difference in efficiency. Indeed, increasing the discretionary power of the intermediate layers of an organization - delegating power to them - enhances productivity by preventing collusion and capture between middle managers and line workers; provided that this detrimental form of collusion takes place in conditions of asymmetric information. To understand how this mechanism works requires an explicit model of the penalty for breach of a collusive agreement a party has to incur to walk away from such a side deal. Delegation is then a simple way for the principal to compensate the uninformed colluding party for walking out of collusion and for using/reporting the information leaked in the collusive negotiation. This threat clearly reduces the informed party incentive to participate in side deals and prevents collusion at a reduced cost.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8302.

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Date of creation: Mar 2011
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Handle: RePEc:cpr:ceprdp:8302

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Keywords: Collusion; Communication; Delegation; Hierarchies;

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References

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  1. Lucia Quesada, 2005. "Collusion as an Informed Principal Problem," Game Theory and Information 0504002, EconWPA.
  2. Faure-Grimaud, Antoine & Laffont, Jean-Jacques & Martimort, David, 1999. "The endogenous transaction costs of delegated auditing," European Economic Review, Elsevier, vol. 43(4-6), pages 1039-1048, April.
  3. Celik, Gorkem, 2004. "Mechanism Design with Collusive Supervision," Microeconomics.ca working papers celik-04-09-13-05-42-19, Vancouver School of Economics, revised 06 Aug 2008.
  4. Laffont & Martimort, 1997. "Collusion under asymmetric information," Working Papers 152574, Institut National de la Recherche Agronomique, France.
  5. Rafael Hortala-Vallve & Miguel Sanchez Villalba, 2010. "Internalizing Team Production Externalities through Delegation: The British Passenger Rail Sector as an Example," Economica, London School of Economics and Political Science, vol. 77(308), pages 785-792, October.
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Cited by:
  1. GAUTIER, Axel & PAOLINI, Dimitri, . "Delegation and information revelation," CORE Discussion Papers RP -2018, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  2. Novaes, Walter & Zingales, Luigi, 2003. "Bureaucracy as a Mechanism to Generate Information," CEPR Discussion Papers 3945, C.E.P.R. Discussion Papers.
  3. Mehmet Barlo & Ayça Özdoğan, 2013. "The Optimality of Team Contracts," Games, MDPI, Open Access Journal, vol. 4(4), pages 670-689, November.
  4. Barlo, Mehmet & Ayca, Ozdogan, 2012. "Team beats collusion," MPRA Paper 37449, University Library of Munich, Germany.
  5. Howitt, Peter & Aghion, Philippe, 1997. "Ajustement macroéconomique aux technologies multi-usages," L'Actualité Economique, Société Canadienne de Science Economique, vol. 73(4), pages 575-593, décembre.

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