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Team beats collusion

Author

Listed:
  • Barlo, Mehmet
  • Ayca, Ozdogan

Abstract

This paper analyzes optimal contracts in a linear hidden-action model with normally distributed returns possessing two moments that are governed jointly by two agents, who can observe each others' effort levels and draft enforceable side-contracts on chosen effort levels and realized returns. After showing that standard constraints, resulting in incentive-contracts, may fail to ensure implementability, we examine (centralized) collusion-proof contracts and (decentralized) team-contracts. We prove that optimal team-contracts provide the highest implementable returns to the principal. In other words, the principal may restrict attention to outsourcing/decentralization without any loss of generality. Moreover, situations in which incentive-contracts are collusion-proof, thus implementable, are fully characterized.

Suggested Citation

  • Barlo, Mehmet & Ayca, Ozdogan, 2012. "Team beats collusion," MPRA Paper 37449, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:37449
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    File URL: https://mpra.ub.uni-muenchen.de/37449/1/MPRA_paper_37449.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Principal-agent problems; moral hazard; linear contracts; side--contracting; collusion; team; outsourcing; decentralization;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • M12 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Personnel Management; Executives; Executive Compensation
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General

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