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Renegotiation and collusion in organizations

Felli, Leonardo and Villas-Boas, J. Miguel (2000) Renegotiation and collusion in organizations. Journal of Economics and Management Strategy, 9 (4). pp. 453-483. ISSN 1058-6407

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Identification Number: 10.1111/j.1430-9134.2000.00453.x


It has been argued that collusion among the members of an organization may lead to inefficiencies and hence should be prevented in equilibrium. This paper shows that whenever the parties to an organization can renegotiate their incentive scheme after collusion, these inefficiencies can be greatly reduced. Moreover, it might not be possible to prevent collusion and renegotiation in equilibrium. Indeed, if collusion is observable but not verifiable, then the organization's optimal incentive scheme will always be renegotiated. If, instead, collusion is not observable to the principal, both collusion and renegotiation will occur in equilibrium with positive probability. The occurrence of collusion and renegotiation should therefore not be taken as evidence of the inefficiency of an organization.

Item Type: Article
Official URL:
Additional Information: © 2000 Massachusetts Institute of Technology
Divisions: Financial Markets Group
Subjects: H Social Sciences > HB Economic Theory
H Social Sciences > HD Industries. Land use. Labor > HD28 Management. Industrial Management
JEL classification: L - Industrial Organization > L2 - Firm Objectives, Organization, and Behavior > L25 - Firm Performance: Size, Diversification and Scope, Age, Profit, and Sales
M - Business Administration and Business Economics; Marketing; Accounting > M1 - Business Administration > M10 - General
M - Business Administration and Business Economics; Marketing; Accounting > M5 - Personnel Economics > M52 - Compensation and Compensation Methods and Their Effects (stock options, fringe benefits, incentives, family support programs, seniority issues)
Date Deposited: 27 Mar 2008 15:36
Last Modified: 20 Jul 2021 01:56

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