Private Enforcement against Collusion in Mechanism Design

Chen, Zhijun (2006): Private Enforcement against Collusion in Mechanism Design. Unpublished.

Abstract

This paper brings a new point of view into the theory of collusion-proof mechanism design, which highlights the principle of divide and conquer. We relax the restriction of publicly enforced grand contract in the framework of Laffont-Martimort-Itoh, which allows us to incorporate the approach of private enforcement into the theory. In a setting of moral hazard with mutually observable actions, we develop a multi-stage mechanism integrated with secret reporting and private transferring and show that the first-best allocation can be implememted in spite of collusion, which implies that preventing collusion entails no cost under new approach.

• Item Type: MPRA Paper
• Institution: School of Economics, Zhejiang University
• Language: English
• Keywords: secret report; private enforcement; collusion-proof mechanism design
• Subjects: C - Mathematical and Quantitative Methods > C7 - Game Theory and Bargaining Theory > C72 - Noncooperative Games; D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information

References

Aubert, C, P. Rey and Kovacic, W (2005) "The Impact of Leniency and Whistleblowing Program on Cartels" International Journal of Industrial Organization, forthcoming Che, Y and Kim, J (2005) "Robustly Collusion-Proof Implementation" Forthcoming in Econometrica. Chen, Z (2006a) "Divide and Conquer" working paper in GREMAQ Chen, Z (2006b) "Secret Report and Optimal Collusion-Proof Mechanism Design: the Case of Moral Hazard" working paper in GREMAQ Chen, Z and P. Rey (2006) "Optimal Design of Leniency Mechanism" working paper in GREMAQ Grossman, S and Hart, O (1983) "An Analysis of the Principal-Agent Problem" Econometrica 51: 7-45 Itoh, H (1993) " Coalitions, Incentives and Risk Sharing" Journal of Economic Theory 60: 410-427 Laffont, J-J and Martimort, D (1997) "Collusion under Asymmetric Information" Econometrica, 65: 875-911 Laffont, J-J and Martimort, D (2000) "Mechanism Design with Collusion and Correlation" Econometrica, 68: 309-342 Ma, C (1988) "Unique Implementation of Incentive Contracts with Many Agents" Review of Economic Studies, 55: 555-572 Mookherjee, D (1984) "Optimal Incentive Schemes with Many Agents" Review of Economic Studies, 51:433-446 Moore, J and Repullo, R (1988) " Subgame Perfect Implementation" Econometrica, 46: 1191-1220 Motta, M and M. Polo (2003) "Leniency Programs and Cartel Prosecution" International Journal of Industrial Organization 21: 347-379 Myerson, R (1982) "Optimal Coordination Mechanism in Generalized Principal-Agent Problems" Journal of Mathematical Economics 10: 67-81 Spagnolo, G (2003) "Optimal Deterrence Mechanisms Against Cartels and Organized Crime" Working Paper Tirole, J (1986) "Hierarchies and Bureaucracies: On the Role of Collusion in Organizations" Journal of Law, Economics and Organization, 2: 181-214 Tirole, J (1992) "Collusion and Theory of Organizations" In Advances in Economic Theory, J-J Laffont (eds.) Sixth World Congress, Cambridge University Press, 71-155