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"Friendships" in Vertical Relations

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  • Leonardo Felli

    (London School of Economics)

  • J. Miguel Villas-Boas

    (University of California, Berkeley)

Abstract

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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Bibliographic Info

Paper provided by EconWPA in its series Game Theory and Information with number 9609003.

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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
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Web page: http://128.118.178.162

Related research

Keywords: friendships; co-insurance; collusion; vertical relations;

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  1. Akerlof, George A & Yellen, Janet L, 1988. "Fairness and Unemployment," American Economic Review, American Economic Association, vol. 78(2), pages 44-49, May.
  2. L. Wade, 1988. "Review," Public Choice, Springer, vol. 58(1), pages 99-100, July.
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