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Friendships in vertical relations

Felli, Leonardo and Villas-Boas, J.M. (1996) Friendships in vertical relations. TE/1996/314. Suntory and Toyota International Centres for Economics and Related Disciplines, London School of Economics and Political Science, London, UK.

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Abstract

It has been argued that collusion among the members of an organization or a vertical structure creates efficiency losses, and hence should be prevented. This paper shows that whenever collusion takes the form of co-insurance agreements, here called ?friendships?, among the members of a vertical structure this may not be the case. Indeed, in such a case, collusion yields only a redistribution of surplus among the members of the vertical structure. Hence, its efficiency costs may be reduced by allowing these ?friendships? to take place, rather than preventing them, and accounting for the redistribution in the design of the optimal incentive scheme.

Item Type: Monograph (Discussion Paper)
Official URL: http://sticerd.lse.ac.uk/
Additional Information: © 1996 Leonardo Felli, J M Villas-Boas
Library of Congress subject classification: H Social Sciences > HB Economic Theory
H Social Sciences > HD Industries. Land use. Labor
Sets: Research centres and groups > Financial Markets Group (FMG)
Collections > Economists Online
Research centres and groups > Suntory and Toyota International Centres for Economics and Related Disciplines (STICERD)
Departments > Economics
Collections > LSE Financial Markets Group (FMG) Working Papers
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Identification Number: TE/1996/314
Date Deposited: 28 Feb 2008
URL: http://eprints.lse.ac.uk/3600/

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