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Collusion and Renegotiation in a Principal-Supervisor-Agent- Relationship (REVISION)

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Author Info

  • R. Strausz

    (FU-Berlin)

Abstract

This paper describes a principal-agent relationship with a supervisor who has information about the agent. The agent and the supervisor have the possibility to collude and misinform the principal. In accordance with the existing literature there exists an optimal contract which excludes collusion in equilibrium. The optimal contract exhibits, however, ex-post inefficient and creates scope for renegotiation. If a renegotiation-stage is incorporated in the game then for some parameter constellations the optimal contract is a contract which necessarily induces collusion. The paper thus shows that the principal's behavior toward ex-post inefficiencies may determine whether collusion occurs in equilibrium.

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File URL: http://128.118.178.162/eps/game/papers/9510/9510002.ps.gz
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File URL: http://128.118.178.162/eps/game/papers/9510/9510002.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Game Theory and Information with number 9510002.

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Date of creation: 16 Oct 1995
Date of revision: 03 Apr 1996
Handle: RePEc:wpa:wuwpga:9510002

Note: Type of Document - PostScript (ps); prepared on IBM PC - PC-TEX;
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Web page: http://128.118.178.162

Related research

Keywords: collusion; renegotiation; supervision;

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References

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  1. Kofman, Fred & Lawarree, Jacques, 1993. "Collusion in Hierarchical Agency," Econometrica, Econometric Society, vol. 61(3), pages 629-56, May.
  2. Strausz, R., 1995. "Collusion and Renegotiation in a Principal-Supervisor-Agent Relationship," Discussion Paper 1995-48, Tilburg University, Center for Economic Research.
  3. 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.
  4. Itoh Hideshi, 1993. "Coalitions, Incentives, and Risk Sharing," Journal of Economic Theory, Elsevier, vol. 60(2), pages 410-427, August.
  5. Maskin, Eric & Tirole, Jean, 1992. "The Principal-Agent Relationship with an Informed Principal, II: Common Values," Econometrica, Econometric Society, vol. 60(1), pages 1-42, January.
  6. Jean-Jacques Laffont & Jean Tirole, 1988. "The Politics of Government Decision-Making: A Theory of Regulatory Capture," Working papers 506, Massachusetts Institute of Technology (MIT), Department of Economics.
  7. Tirole, Jean, 1991. "Collusion and the Theory of Organizations," IDEI Working Papers 9, Institut d'Économie Industrielle (IDEI), Toulouse.
  8. Laffont, Jean-Jacques, 1990. "Analysis of Hidden Gaming in a Three-Level Hierarchy," Journal of Law, Economics and Organization, Oxford University Press, vol. 6(2), pages 301-24, Fall.
  9. Border, Kim C & Sobel, Joel, 1987. "Samurai Accountant: A Theory of Auditing and Plunder," Review of Economic Studies, Wiley Blackwell, vol. 54(4), pages 525-40, October.
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