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Mechanism Design with Collusive Supervision

  • Celik, Gorkem

We analyze an adverse selection environment with third party supervision. We assume that the "supervisor" and the "agent" can collude while interacting with the "principal". As long as the supervisor is symmetrically informed with the agent, the former's existence does not improve the principal's rent extraction. This is due to the "coalitional efficiency" between the supervisor and the agent. However, asymmetric information between these two parties can cause a "collusion failure", which undermines the coalitional efficiency. In that case, we show that the principal can increase his payoff, by manipulating the agent's opportunity cost for colluding with the supervisor. Delegating the authority to contract with the agent to the supervisor is not successful in enhancing the principal's payoff, since the principal loses the instrument to manipulate the opportunity cost of collusion under this organizational form. The increase in the principal's rent extraction does not necessarily imply an overall welfare improvement. Social welfare may decline with the introduction of the supervisor.

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File URL: http://microeconomics.ca/gorkem_celik/sup0712.pdf
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Paper provided by Vancouver School of Economics in its series Microeconomics.ca working papers with number celik-04-09-13-05-42-19.

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Length: 0 pages
Date of creation: 13 Sep 2004
Date of revision: 06 Aug 2008
Handle: RePEc:ubc:pmicro:celik-04-09-13-05-42-19
Contact details of provider: Web page: http://www.economics.ubc.ca/

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  3. Yeon-Koo Che & Jinwoo Kim, 2005. "Robustly collusion-proof implementation," Discussion Papers 0506-12, Columbia University, Department of Economics.
  4. Kofman, F. & Lawarree, J., 1990. "Collusion in Hierarchical Agency," Working Papers 91-01, University of Washington, Department of Economics.
  5. Jullien, Bruno, 1997. "Participation Constraints in Adverse Selection Models," IDEI Working Papers 67, Institut d'Économie Industrielle (IDEI), Toulouse.
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  7. Antoine Faure-Grimaud & Jean-Jacques Laffont & David Martimort, 1998. "A theory of supervision with endogenous transaction costs," LSE Research Online Documents on Economics 19356, London School of Economics and Political Science, LSE Library.
  8. Jean-Jacques Laffont & David Martimort, 1998. "Collusion and Delegation," RAND Journal of Economics, The RAND Corporation, vol. 29(2), pages 280-305, Summer.
  9. Lucia Quesada, 2005. "Collusion as an Informed Principal Problem," Game Theory and Information 0504002, EconWPA.
  10. Antoine Faure-Grimaud & Jean-Jacques Laffont & David Martimort, 2003. "Collusion, Delegation and Supervision with Soft Information," Review of Economic Studies, Oxford University Press, vol. 70(2), pages 253-279.
  11. Sergei Severinov, 2008. "The value of information and optimal organization," RAND Journal of Economics, RAND Corporation, vol. 39(1), pages 238-265.
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  14. Sandeep Baliga & Tomas Sjostrom, 1996. "Decentralization and Collusion," Harvard Institute of Economic Research Working Papers 1757, Harvard - Institute of Economic Research.
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  19. Fahad Khalil & Jacques Lawarree, 2004. "Incentives for Corruptible Auditors in the Absence of Commitment," Working Papers UWEC-2003-02-FC, University of Washington, Department of Economics.
  20. Faure-Grimaud, Antoine & Martimort, David, 2001. "On some agency costs of intermediated contracting," Economics Letters, Elsevier, vol. 71(1), pages 75-82, April.
  21. Dilip Mookherjee, 2005. "Decentralization, Hierarchies and Incentives: A Mechanism Design Perspective," Boston University - Department of Economics - Working Papers Series WP2005-034, Boston University - Department of Economics, revised Sep 2005.
  22. Bernard Caillaud & Philippe Jehiel, 1998. "Collusion in Auctions with Externalities," RAND Journal of Economics, The RAND Corporation, vol. 29(4), pages 680-702, Winter.
  23. Gregory Pavlov, 2006. "Colluding on Participation Decisions," Boston University - Department of Economics - Working Papers Series WP2006-030, Boston University - Department of Economics.
  24. Jean-Jacques Laffont & David Martimort, 2000. "Mechanism Design with Collusion and Correlation," Econometrica, Econometric Society, vol. 68(2), pages 309-342, March.
  25. 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.
  26. Martimort, David, 1999. "The Life Cycle of Regulatory Agencies: Dynamic Capture and Transaction Costs," Review of Economic Studies, Wiley Blackwell, vol. 66(4), pages 929-47, October.
  27. Dilip Mookherjee & Masatoshi Tsumagari, 2004. "The Organization of Supplier Networks: Effects of Delegation and Intermediation," Econometrica, Econometric Society, vol. 72(4), pages 1179-1219, 07.
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