Risk Averse Supervisors and the Efficiency of Collusion
This paper studies the efficiency of collusion between supervisors and supervisees. Building on Tirole (1986)'s results that deterring collusion with infinitely risk averse supervisors is impossible, while it is costless to do so under risk neutrality, we develop here a theory of collusion based on a trade-off between the risk premia required by (less extreme) risk attitudes and incentives. This allows us to link the efficiency of collusion to the supervisor's risk aversion and to various parameters characterizing the economic environment in which collusion may take place. We are then able to derive implications for the design of organizations, like determining how the number of tasks/agents per supervisor or the level of competition may impact on the cost of collusion, studying the impact of vertical integration on those same costs, or characterizing the role of uncertainty on side-contracting.
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Volume (Year): 2 (2003)
Issue (Month): 1 (January)
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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Jean-Jacques Laffont & Jean Tirole, 1993. "A Theory of Incentives in Procurement and Regulation," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121743, December.
- Jean-Jacques Laffont & David Martimort, 1997.
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- Baliga, Sandeep, 1999. "Monitoring and Collusion with "Soft" Information," Journal of Law, Economics and Organization, Oxford University Press, vol. 15(2), pages 434-440, July.
- Bengt Holmstrom, 1997.
"Moral Hazard and Observability,"
Levine's Working Paper Archive
1205, David K. Levine.
- Bull, Jesse & Watson, Joel, 2000.
"Evidence Disclosure and Verifiability,"
University of California at San Diego, Economics Working Paper Series
qt6th0060j, Department of Economics, UC San Diego.
- Bull, Jesse & Watson, Joel, 2002. "Evidence Disclosure and Verfiability," University of California at San Diego, Economics Working Paper Series qt19p7z2gm, Department of Economics, UC San Diego.
- 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.
- Leonardo Felli & J. Miguel Villas-Boas, 2000. "Renegotiation and Collusion in Organizations," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 9(4), pages 453-483, December.
- Steven Shavell, 1979. "Risk Sharing and Incentives in the Principal and Agent Relationship," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 55-73, Spring.
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