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Decentralization and Collusion

  • Sandeep Baliga
  • Tomas Sjostrom

We consider a model where agents work in sequence on a project, share information not available to the principal, and can collude. Due to limited liability the Coase theormem does not apply. The distribution of surplus among the agents is there an important control variable for the principal, which gives us a theory of how to delegate in an organization subject to moral hazard. The optimal distribution of surplus can always be achieved by delegating in the right way (decentralization) without using "message games" (centralization).

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Paper provided by Harvard - Institute of Economic Research in its series Harvard Institute of Economic Research Working Papers with number 1757.

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Date of creation: 1996
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Handle: RePEc:fth:harver:1757
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  1. Sandeep Baliga & Tomas Sjostrom, 1996. "Decentralization and Collusion," Harvard Institute of Economic Research Working Papers 1757, Harvard - Institute of Economic Research.
  2. Mookherjee, Dilip, 1984. "Optimal Incentive Schemes with Many Agents," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 433-46, July.
  3. Melumad, Nahum & Mookherjee, Dilip & Reichelstein, Stefan, 1992. "A theory of responsibility centers," Journal of Accounting and Economics, Elsevier, vol. 15(4), pages 445-484, December.
  4. Perez-Castrillo, J.D. & Macho-Stadler, I., 1992. "Centralized and Decentralized Contracts in a Moral Hazad Environment," UFAE and IAE Working Papers 179.92, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  5. Mookherjee, D. & Reichelstein, S., 1996. "Budgeting and Hierarchical Control," Papers 71, Boston University - Industry Studies Programme.
  6. McAfee, R Preston & McMillan, John, 1995. "Organizational Diseconomies of Scale," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 4(3), pages 399-426, Fall.
  7. Mookherjee Dilip & Reichelstein Stefan, 2001. "Incentives and Coordination in Hierarchies," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 1(1), pages 1-38, April.
  8. Nahum D. Melumad & Dilip Mookherjee & Stefan Reichelstein, 1995. "Hierarchical Decentralization of Incentive Contracts," RAND Journal of Economics, The RAND Corporation, vol. 26(4), pages 654-672, Winter.
  9. Macho-Stadler, Ines & Perez-Castrillo, J. David, 1993. "Moral hazard with several agents : The gains from cooperation," International Journal of Industrial Organization, Elsevier, vol. 11(1), pages 73-100, March.
  10. 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.
  11. Itoh Hideshi, 1993. "Coalitions, Incentives, and Risk Sharing," Journal of Economic Theory, Elsevier, vol. 60(2), pages 410-427, August.
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