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Renegotiation and collusion in organizations

By Leonardo Felli and J. Miguel Villas-Boas

Abstract

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

Topics: HB Economic Theory, HD28 Management. Industrial Management
Publisher: Wiley
Year: 2000
DOI identifier: 10.1111/j.1430-9134.2000.00453.x
OAI identifier: oai:eprints.lse.ac.uk:3952
Provided by: LSE Research Online
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