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Team beats collusion

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  • Barlo, Mehmet
  • Ayca, Ozdogan

Abstract

This 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 Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 37449.

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Date of creation: 19 Mar 2012
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Handle: RePEc:pra:mprapa:37449

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Keywords: Principal-agent problems; moral hazard; linear contracts; side--contracting; collusion; team; outsourcing; decentralization;

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  1. Thomson, William, 1981. "Nash's Bargaining Solution and Utilitarian Choice Rules," Econometrica, Econometric Society, vol. 49(2), pages 535-38, March.
  2. 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.
  3. Jelovac, I. & Macho-Stadler, I., 1998. "Comparing Organizational Structures in Health Services," UFAE and IAE Working Papers 412.98, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  4. Sanford Grossman & Oliver Hart, . "An Analysis of the Principal-Agent Problem," Rodney L. White Center for Financial Research Working Papers 15-80, Wharton School Rodney L. White Center for Financial Research.
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  6. 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.
  7. Barlo, Mehmet & Ozdogan, Ayca, 2011. "Optimality of linearity with collusion and renegotiation," MPRA Paper 35548, University Library of Munich, Germany.
  8. Martin F. Hellwig & Klaus M. Schmidt, 2002. "Discrete-Time Approximations of the Holmstrom-Milgrom Brownian-Motion Model of Intertemporal Incentive Provision," Econometrica, Econometric Society, vol. 70(6), pages 2225-2264, November.
  9. Demski, Joel S. & Sappington, David, 1984. "Optimal incentive contracts with multiple agents," Journal of Economic Theory, Elsevier, vol. 33(1), pages 152-171, June.
  10. Mookherjee, Dilip, 1984. "Optimal Incentive Schemes with Many Agents," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 433-46, July.
  11. Itoh, Hideshi, 1994. "Job design, delegation and cooperation: A principal-agent analysis," European Economic Review, Elsevier, vol. 38(3-4), pages 691-700, April.
  12. Holmstrom, Bengt & Milgrom, Paul, 1987. "Aggregation and Linearity in the Provision of Intertemporal Incentives," Econometrica, Econometric Society, vol. 55(2), pages 303-28, March.
  13. Baliga, Sandeep & Sjostrom, Tomas, 1998. "Decentralization and Collusion," Journal of Economic Theory, Elsevier, vol. 83(2), pages 196-232, December.
  14. Itoh Hideshi, 1993. "Coalitions, Incentives, and Risk Sharing," Journal of Economic Theory, Elsevier, vol. 60(2), pages 410-427, August.
  15. Demski, Joel S. & Sappington, David E. M. & Spiller, Pablo T., 1988. "Incentive schemes with multiple agents and bankruptcy constraints," Journal of Economic Theory, Elsevier, vol. 44(1), pages 156-167, February.
  16. Macho-Stadler, Ines & Perez-Castrillo, J David, 1998. "Centralized and Decentralized Contracts in a Moral Hazard Environment," Journal of Industrial Economics, Wiley Blackwell, vol. 46(4), pages 489-510, December.
  17. Faure-Grimaud Antoine & Laffont Jean-Jacques & Martimort David, 2003. "Risk Averse Supervisors and the Efficiency of Collusion," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 2(1), pages 1-32, January.
  18. Jean-Jacques Laffont & David Martimort, 2000. "Mechanism Design with Collusion and Correlation," Econometrica, Econometric Society, vol. 68(2), pages 309-342, March.
  19. Brusco, Sandro, 1997. "Implementing Action Profiles when Agents Collude," Journal of Economic Theory, Elsevier, vol. 73(2), pages 395-424, April.
  20. Ma, Ching-to & Moore, John & Turnbull, Stephen, 1988. "Stopping agents from "cheating"," Journal of Economic Theory, Elsevier, vol. 46(2), pages 355-372, December.
  21. Holmstrom, Bengt & Milgrom, Paul, 1991. "Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design," Journal of Law, Economics and Organization, Oxford University Press, vol. 7(0), pages 24-52, Special I.
  22. Laffont, Jean-Jacques & Rochet, Jean-Charles, 1997. " Collusion in Organizations," Scandinavian Journal of Economics, Wiley Blackwell, vol. 99(4), pages 485-95, December.
  23. Leonardo Felli, 1996. "Preventing Collusion Through Discretion," STICERD - Theoretical Economics Paper Series /1996/303, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
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