Collusion and the Organisation of the Firm
University of Oregon - Department of Economics
University of New South Wales
July 9, 2013
Collusive behavior is commonplace in large firms and other complex organizations. We show that the threat of collusion influences a number of organizational dimensions including outsourcing decisions and the allocation of production costs. We use a standard model where a principal hires a productive agent and an auditor, and cannot avoid collusion between the two. The optimal contract lets the agent choose between working outside the firm (no monitoring and full claims over production costs) or in the firm (monitoring but no claims over costs). Collusion rents are eliminated. The results are robust to a number of extensions.
Number of Pages in PDF File: 43
Keywords: Collusion, Supervision, Mechanism design, Theory of the Firm, Outsourcing
JEL Classification: D82, C72, D23working papers series
Date posted: October 18, 2012 ; Last revised: August 16, 2013
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