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Decentralization of contracts with interim sidecontracting

  • Theilen, Bernd, 1965-
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    This paper gives a new explanation for the phenomena of subcontracting. A model in which a principal contracts two agents who work in a sequence on a project, have soft information and can collude is considered. Side-contracts between agents can be signed at any stage of the game. Due to limited liability and moral hazard agents obtain a rent. The principal’s problem is to find the preferable contracting structure. It is shown that in this setting a decentralized contracting structure can be superior to a centralized structure for the principal. The paper derives the conditions under which this holds. Journal of Economic Literature Classification Numbers: D23, D82, L14, L22. Keywords: Contract delegation, Collusion, Interim side-contracting, Moral hazard.

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    File URL: http://hdl.handle.net/2072/169684
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    Paper provided by Universitat Rovira i Virgili, Department of Economics in its series Working Papers with number 2072/169684.

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    Date of creation: 2011
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    Handle: RePEc:urv:wpaper:2072/169684
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