Team beats collusion

Barlo, Mehmet and Ayca, Ozdogan (2012): Team beats collusion.

Abstract

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: MPRA Paper
• Language: English
• Keywords: Principal-agent problems; moral hazard; linear contracts; side--contracting; collusion; team; outsourcing; decentralization
• Subjects: D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information ; Mechanism Design; M - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M1 - Business Administration > M12 - Personnel Management ; Executives; Executive Compensation; J - Labor and Demographic Economics > J3 - Wages, Compensation, and Labor Costs > J30 - General

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