Decentralization and Collusion

Moral Hazard in Hierarchies and Soft Information

“…The intuition is as follows. First, since S wishes to extract as much as possible from her relationship with A, she credibly commits, in case A rejectsSC, to the reporting strategy that leads to the equilibrium with the lowest possible payoff to A, so as to relax (3). Such a reporting strategy is invariant with private information σ since information is soft.…”

“…2 Economics, since Tirole [1986], has addressed these issues, investigating the possibility for agents to reach binding, though hidden, agreements. 3 The relevance of such "side contracting" depends on the nature of the information gathered by supervisors. This, in turn, determines the usefulness of the supervisor.…”

“…As pointed out by Khalil, Lawarrée and Yun [2010] (hereafter KLY) and Vafaï [2002Vafaï [ , 2010, while collusion reduces the agent's gains from shirking (since a bribe needs to be paid not to be caught) extortion instead punishes the hard working agent (since a bribe needs to be paid not to be unfairly punished). 3 One may invoke honor, friendship, and repeated relationships to justify their enforceability. As Itoh [1993] puts it: "this assumption is clearly extreme.…”

Correlation and relative performance evaluation

“…Side-transfers and better observation among the agents may by themselves be reasons for cooperative schemes, see for example Holmström and Milgrom (1990) and Itoh (1992). See also Baliga and Sjöström (1998) for a model of sequential efforts in a limited liability framework close to the one developed here. Their focus is however on collusion, a topic not treated here.…”

Decentralization of contracts with interim side-contracting

“…Or agent 1 might be an architect who delivers a blueprint to a constructor (agent 2) who is in charge of the production process (cf. Baliga and Sjöström, 1998). Finally, agent 1 can be a hospital which takes all investment decisions and agent 2 a physician who provides health services (cf.…”