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Modeling collusion as an informed principal problem

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  • Lucia Quesada

    (Universite de Toulouse)

Abstract

In this paper we address the question of collusion in mechanisms under asymmetric information by assuming that one of the colluding parties offers a side contract to the other one. We develop a methodology to analyze collusion as an informed principal problem. We show that if collusion occurs after the agents accept or reject the principal’s offer, the dominant-strategy implementation of the optimal contract without collusion is collusion proof. In the second part of the paper, we look at a different timing, assuming that the agents’ decision to accept or reject the principal’s offer is taken after collusion, so the agents share their private information before accepting the principal’s offer. On the other hand, we assume that the collusion offer includes a punishment strategy, to be used whenever the other agent rejects the side contract. We establish the conditions that have to be satisfied for a contract to be collusion proof and we show that the optimal contract without collusion is no longer collusion proof. The optimal collusion proof contract is asymmetric, both in transfers and in quantities.

Suggested Citation

  • Lucia Quesada, 2003. "Modeling collusion as an informed principal problem," Game Theory and Information 0304002, EconWPA.
  • Handle: RePEc:wpa:wuwpga:0304002 Note: Type of Document - pdf; prepared on IBM PC - PC-TEX; to print on HP/A4paper; pages: 45 ; figures: included
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    File URL: http://econwpa.repec.org/eps/game/papers/0304/0304002.pdf
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    References listed on IDEAS

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    1. Myerson, Roger B, 1983. "Mechanism Design by an Informed Principal," Econometrica, Econometric Society, vol. 51(6), pages 1767-1797, November.
    2. Kreps, David M & Wilson, Robert, 1982. "Sequential Equilibria," Econometrica, Econometric Society, vol. 50(4), pages 863-894, July.
    3. Maskin, Eric & Tirole, Jean, 1990. "The Principal-Agent Relationship with an Informed Principal: The Case of Private Values," Econometrica, Econometric Society, vol. 58(2), pages 379-409, March.
    4. Myerson, Roger B, 1984. "Two-Person Bargaining Problems with Incomplete Information," Econometrica, Econometric Society, vol. 52(2), pages 461-487, March.
    5. Baliga, Sandeep & Sjostrom, Tomas, 1998. "Decentralization and Collusion," Journal of Economic Theory, Elsevier, vol. 83(2), pages 196-232, December.
    6. Maskin, Eric & Tirole, Jean, 1992. "The Principal-Agent Relationship with an Informed Principal, II: Common Values," Econometrica, Econometric Society, vol. 60(1), pages 1-42, January.
    7. Mookherjee, Dilip & Reichelstein, Stefan, 1992. "Dominant strategy implementation of Bayesian incentive compatible allocation rules," Journal of Economic Theory, Elsevier, vol. 56(2), pages 378-399, April.
    8. Cremer, Jacques & McLean, Richard P, 1988. "Full Extraction of the Surplus in Bayesian and Dominant Strategy Auctions," Econometrica, Econometric Society, vol. 56(6), pages 1247-1257, November.
    9. Jean-Jacques Laffont & David Martimort, 1997. "Collusion under Asymmetric Information," Econometrica, Econometric Society, vol. 65(4), pages 875-912, July.
    10. Baron, David P & Besanko, David, 1992. "Information, Control, and Organizational Structure," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 1(2), pages 237-275, Summer.
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    Citations

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    Cited by:

    1. Celik, Gorkem, 2004. "Counter Marginalization of Information Rents under Collusion," Microeconomics.ca working papers celik-04-01-23-02-48-07, Vancouver School of Economics, revised 27 Jan 2008.
    2. Nicolas Gruyer, 2008. "Optimal Auctions when a seller is bound to sell to collusive bidders (new version of "using lotteries ...")," Economics Working Papers 06, LEEA (air transport economics laboratory), ENAC (french national civil aviation school).
    3. Che,Y.-K. & Kim,J., 2004. "Collusion-proof implementation of optimal mechanisms," Working papers 4, Wisconsin Madison - Social Systems.

    More about this item

    Keywords

    Collusion Informed principal Mechanism design;

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production

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