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Contracts under Wage Compression: A Case of Beneficial Collusion

Author

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  • Dongsoo Shin

    () (Department of Economics, Leavey School of Business, Santa Clara University)

Abstract

This paper considers a principal-agent model with adverse selection and limited wage discrimination. Under wage compression, an agent may have an incentive to free ride on other agents by manipulating his private information. When collusion among the agents is not possible, the principal distorts the output schedule to reduce information rent associated with the free-riding opportunity. Under collusion, however, the principal can reduce the information rent by inducing side contracts among the agents, thus partly removing the distortion in the output schedule. We show that side contracts among the agents take place in equilibrium and that the prospect of collusion is beneficial.

Suggested Citation

  • Dongsoo Shin, 2007. "Contracts under Wage Compression: A Case of Beneficial Collusion," Southern Economic Journal, Southern Economic Association, vol. 74(1), pages 143-157, July.
  • Handle: RePEc:sej:ancoec:v:74:1:y:2007:p:143-157
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    Citations

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    Cited by:

    1. Dongsoo Shin, 2008. "Collusion and Outcome Equivalency," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 164(3), pages 449-459, September.
    2. Fahad Khalil & Jacques Lawarrée & Sungho Yun, 2010. "Bribery versus extortion: allowing the lesser of two evils," RAND Journal of Economics, RAND Corporation, vol. 41(1), pages 179-198.

    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production

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