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"Friendships" in Vertical Relations

Author

Listed:
  • Leonardo Felli

    (London School of Economics)

  • J. Miguel Villas-Boas

    (University of California, Berkeley)

Abstract

It has been argued that collusion among the members of an organization or a vertical structure creates efficiency losses, and hence should be prevented. This paper shows that whenever collusion takes the form of co-insurance agreements, here called `friendships', among the members of a vertical structure this may not be the case. Indeed, in such a case, collusion yields only a redistribution of surplus among the members of the vertical structure. Hence, its efficiency costs may be reduced by allowing these `friendships' to take place, rather than preventing them, and accounting for the redistribution in the design of the optimal incentive scheme.

Suggested Citation

  • Leonardo Felli & J. Miguel Villas-Boas, 1996. ""Friendships" in Vertical Relations," Game Theory and Information 9609003, EconWPA, revised 21 Sep 1996.
  • Handle: RePEc:wpa:wuwpga:9609003
    Note: Type of Document - LaTex; prepared on IBM PC - PC-TEX; to print on PostScript 300DPI; pages: 25 ; figures: included
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    References listed on IDEAS

    as
    1. Kofman, Fred & Lawarree, Jacques, 1996. "On the optimality of allowing collusion," Journal of Public Economics, Elsevier, vol. 61(3), pages 383-407, September.
    2. L. Wade, 1988. "Review," Public Choice, Springer, vol. 58(1), pages 99-100, July.
    3. Akerlof, George A & Yellen, Janet L, 1988. "Fairness and Unemployment," American Economic Review, American Economic Association, vol. 78(2), pages 44-49, May.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    friendships; co-insurance; collusion; vertical relations;

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure

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