Collusion and Delegation

RAND Journal of Economics, Vol. 29, No. 2

Posted: 8 Jul 1998

See all articles by Jean-Jacques Laffont

Jean-Jacques Laffont

University of Southern California - Department of Economics (Deceased)

David Martimort

University of Toulouse 1 - Industrial Economic Institute (IDEI); CESifo (Center for Economic Studies and Ifo Institute)

Abstract

We discuss the internal organization of the firm, arguing that the comparison between a centralized and a decentralized hierarchical organization should be cast in terms of the agency costs associated with the different side-contracting games that agents play in these organizations. In our model, with no limits on communication between the agents and the principal (complete contracting), collusion is not an issue in a centralized organization. Centralization always dominates (at least weakly) delegation. With limits on communication (incomplete contracting), collusion may have some bite under centralization. Limits on communication introduce an anonymity condition on the contract, creating a conflict between participation and coalition incentive constraints under centralization. By shifting the bargaining power in the side-contracting stage, delegation is non-anonymous and asymmetric by design. This conflict is then avoided or diminished depending on the exact timing of the delegation game.

JEL Classification: L14, L22

Suggested Citation

Laffont, Jean-Jacques and Martimort, David, Collusion and Delegation. RAND Journal of Economics, Vol. 29, No. 2. Available at SSRN: https://ssrn.com/abstract=105668

Jean-Jacques Laffont

University of Southern California - Department of Economics (Deceased)

No Address Available

David Martimort (Contact Author)

University of Toulouse 1 - Industrial Economic Institute (IDEI) ( email )

Manufacture des Tabacs
21 Allee de Brienne bat. F
Toulouse Cedex, F-31000
France
+33 5 6112 8614 (Phone)
+33 5 6112 8637 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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