Collusion and the Organisation of the Firm

Abstract:     
Collusive behavior is commonplace in large firms and other complex organizations. This paper shows that the threat of collusion can influence a number of organizational dimensions including outsourcing, allocation of decision rights, and scope of supervision. We use a standard asymmetric information model where a principal hires a productive agent and a manager, and cannot avoid collusion between the two. The optimal response to collusion is a contract that lets the productive agent choose between producing as an independent contractor (no supervision, and no decision rights) or as employee (supervision and decision rights), and eliminates rents from collusion.

Number of Pages in PDF File: 29

Keywords: Collusion, Supervision, Mechanism design, Theory of the Firm, Outsourcing

JEL Classification: D82, C72, D23

working papers series