Team beats collusion

Barlo, Mehmet and Özdoğan, Ayça (2012) Team beats collusion. [Working Paper / Technical Report] Sabanci University ID:UNSPECIFIED

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This paper analyzes optimal contracts in a linear hidden-action model with normally distributed returns possessing two moments that are governed jointly by two agents, who can observe each others' effort levels and draft enforceable side-contracts on chosen effort levels and realized returns. After showing that standard constraints, resulting in incentive-contracts, may fail to ensure implementability, we examine (centralized) collusion-proof contracts and (decentralized) team-contracts. We prove that optimal team--contracts provide the highest implementable returns to the principal. In other words, the principal may restrict attention to outsourcing/decentralization without any loss of generality. Moreover, situations in which incentive--contracts are collusion--proof, thus implementable, are fully characterized.

Item Type:Working Paper / Technical Report
Additional Information:The earlier version of this paper was titled "Incentives under collusion in a two-agent hidden-action model of a financial enterprize."
Uncontrolled Keywords:Principal-agent problems; moral hazard; linear contracts; side-contracting; collusion; team; outsourcing; decentralization ¤
Subjects:H Social Sciences > HB Economic Theory
ID Code:18928
Deposited By:Mehmet Barlo
Deposited On:16 May 2012 15:48
Last Modified:16 May 2012 15:48

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