It has been argued that collusion among the members of an organization or a vertical structure creates efficiency losses, and hence should be prevented. This paper shows that whenever collusion takes the form of co-insurance agreements, here called `friendships', among the members of a vertical structure this may not be the case. Indeed, in such a case, collusion yields only a redistribution of surplus among the members of the vertical structure. Hence, its efficiency costs may be reduced by allowing these `friendships' to take place, rather than preventing them, and accounting for the redistribution in the design of the optimal incentive scheme.
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Length: 25 pages Date of creation: 21 Sep 1996 Date of revision:
21 Sep 1996 Handle: RePEc:wpa:wuwpga:9609003
Note: Type of Document - LaTex; prepared on IBM PC - PC-TEX; to print on PostScript 300DPI; pages: 25 ; figures: included Contact details of provider: Web page: http://129.3.20.41
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Find related papers by JEL classification: D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
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