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Risk averse supervisors and the efficiency of collusion

Faure-Grimaud, Antoine, Laffont, Jean-Jacques and Martimort, David (2002) Risk averse supervisors and the efficiency of collusion. Contributions to Theoretical Economics, 2 (1). ISSN 1534-5971

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Abstract

This paper studies the efficiency of collusion between supervisors and supervisees. Building on Tirole (1986)’s results that deterring collusion with infinitely risk averse supervisors is impossible, while it is costless to do so under risk neutrality, we develop here a theory of collusion based on a trade-off between the risk premia required by (less extreme) risk attitudes and incentives. This allows us to link the efficiency of collusion to the supervisor’s risk aversion and to various parameters characterizing the economic environment in which collusion may take place. We are then able to derive implications for the design of organizations, like determining how the number of tasks/agents per supervisor or the level of competition may impact on the cost of collusion, studying the impact of vertical integration on those same costs, or characterizing the role of uncertainty on side-contracting.

Item Type: Article
Official URL: http://www.bepress.com/bejte/contributions/vol2/is...
Additional Information: Published (2002) Berkeley Electronic Press. LSE has developed LSE Research Online so that users may access research output of the School. Copyright © and Moral Rights for the papers on this site are retained by the individual authors and/or other copyright owners. Users may download and/or print one copy of any article(s) in LSE Research Online to facilitate their private study or for non-commercial research. You may not engage in further distribution of the material or use it for any profit-making activities or any commercial gain. You may freely distribute the URL (http://eprints.lse.ac.uk) of the LSE Research Online website.
Library of Congress subject classification: H Social Sciences > HD Industries. Land use. Labor > HD61 Risk Management
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Date Deposited: 26 Jun 2006
URL: http://eprints.lse.ac.uk/20/

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