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Counter Marginalization of Information Rents: Implementing Negatively Correlated Compensation Schemes for Colluding Parties

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  • Celik Gorkem

    () (University of British Columbia)

Abstract

A principal contracts with a productive agent whose production cost is private information and with an insurer who can insure the principal against variations in the payment to the agent. The insurer and the agent can collude in their responses to the principal's contract. Non-cooperative play of the principal's contract constitutes the outside option for the colluding parties. In this setup, we characterize the implementable outcomes for the principal. We then identify the optimal implementable outcome under the assumption that the principal faces a budget constraint. The optimal outcome provides the principal with "partial" insurance. For higher realizations of the production cost, the budget may not be exhausted even though the principal is not directly concerned with the unspent portion of the monetary funds.

Suggested Citation

  • Celik Gorkem, 2008. "Counter Marginalization of Information Rents: Implementing Negatively Correlated Compensation Schemes for Colluding Parties," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 8(1), pages 1-45, February.
  • Handle: RePEc:bpj:bejtec:v:8:y:2008:i:1:n:3
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    References listed on IDEAS

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    1. Bull, Jesse & Watson, Joel, 2004. "Evidence disclosure and verifiability," Journal of Economic Theory, Elsevier, vol. 118(1), pages 1-31, September.
    2. Bernardo, Antonio E & Talley, Eric & Welch, Ivo, 2000. "A Theory of Legal Presumptions," Journal of Law, Economics, and Organization, Oxford University Press, pages 1-49.
    3. Steven Shavell, 1989. "Sharing of Information Prior to Settlement or Litigation," RAND Journal of Economics, The RAND Corporation, pages 183-195.
    4. Bengt Holmstrom, 1982. "Moral Hazard in Teams," Bell Journal of Economics, The RAND Corporation, vol. 13(2), pages 324-340, Autumn.
    5. Hyun Song Shin, 1998. "Adversarial and Inquisitorial Procedures in Arbitration," RAND Journal of Economics, The RAND Corporation, pages 378-405.
    6. Shepherd, George B., 1999. "An empirical study of the economics of pretrial discovery," International Review of Law and Economics, Elsevier, vol. 19(2), pages 245-263, June.
    7. Jesse Bull, 2009. "Costly Evidence And Systems Of Fact-Finding," Bulletin of Economic Research, Wiley Blackwell, vol. 61(2), pages 103-125, April.
    8. Daniel L. Rubinfeld & David E.M. Sappington, 1987. "Efficient Awards and Standards of Proof in Judicial Proceedings," RAND Journal of Economics, The RAND Corporation, pages 308-315.
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    Cited by:

    1. Gick, Wolfgang, 2015. "A Theory of Delegated Contracting," Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 113069, Verein für Socialpolitik / German Economic Association.
    2. Celik, Gorkem, 2009. "Mechanism design with collusive supervision," Journal of Economic Theory, Elsevier, vol. 144(1), pages 69-95, January.

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