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Friendships in Vertical Relations - (Now published under the title 'Renegotiation and Collusion in Organisations', in 'Journal of Economics and Management Strategy', 9(4)(Winter 2001), pp.453-483.)

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  • Leonardo Felli
  • J M Villas-Boas

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.

Suggested Citation

  • Leonardo Felli & J M Villas-Boas, 1996. "Friendships in Vertical Relations - (Now published under the title 'Renegotiation and Collusion in Organisations', in 'Journal of Economics and Management Strategy', 9(4)(Winter 2001), pp.453-483.)," STICERD - Theoretical Economics Paper Series /1996/314, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
  • Handle: RePEc:cep:stitep:/1996/314
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