Team beats collusion

Mehmet Barlo () and Ozdogan Ayca

MPRA Paper from University Library of Munich, Germany

Abstract: This paper analyzes optimal contracts in a linear hidden-action model with normally distributed returns possessing two moments that are governed jointly by two agents, who can observe each others' effort levels and draft enforceable side-contracts on chosen effort levels and realized returns. After showing that standard constraints, resulting in incentive-contracts, may fail to ensure implementability, we examine (centralized) collusion-proof contracts and (decentralized) team-contracts. We prove that optimal team-contracts provide the highest implementable returns to the principal. In other words, the principal may restrict attention to outsourcing/decentralization without any loss of generality. Moreover, situations in which incentive-contracts are collusion-proof, thus implementable, are fully characterized.

Keywords: Principal-agent problems; moral hazard; linear contracts; side--contracting; collusion; team; outsourcing; decentralization (search for similar items in EconPapers)
JEL-codes: D82 J30 M12 (search for similar items in EconPapers)
Date: 2012-03-19
New Economics Papers: this item is included in nep-bec, nep-cta, nep-hrm and nep-mic
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:37449

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