Team beats collusion
AbstractThis paper analyzes optimal contracts in a linear hidden-action model with normally distributed returns possessing two moments that are governed jointly by two agents, who can observe each others' effort levels and draft enforceable side-contracts on chosen effort levels and realized returns. After showing that standard constraints, resulting in incentive-contracts, may fail to ensure implementability, we examine (centralized) collusion-proof contracts and (decentralized) team-contracts. We prove that optimal team-contracts provide the highest implementable returns to the principal. In other words, the principal may restrict attention to outsourcing/decentralization without any loss of generality. Moreover, situations in which incentive-contracts are collusion-proof, thus implementable, are fully characterized.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 37449.
Date of creation: 19 Mar 2012
Date of revision:
Principal-agent problems; moral hazard; linear contracts; side--contracting; collusion; team; outsourcing; decentralization;
Find related papers by JEL classification:
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- M12 - Business Administration and Business Economics; Marketing; Accounting - - Business Administration - - - Personnel Management; Executives; Executive Compensation
- J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-03-28 (All new papers)
- NEP-BEC-2012-03-28 (Business Economics)
- NEP-CTA-2012-03-28 (Contract Theory & Applications)
- NEP-HRM-2012-03-28 (Human Capital & Human Resource Management)
- NEP-MIC-2012-03-28 (Microeconomics)
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