"Friendships" in Vertical Relations

Leonardo Felli () and J. Miguel Villas-Boas

Game Theory and Information from EconWPA

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.

Keywords: friendships; co-insurance; collusion; vertical relations (search for similar items in EconPapers)
JEL-codes: D23 L22 (search for similar items in EconPapers)
Date: 1996-09-21, Revised 1996-09-21
Note: Type of Document - LaTex; prepared on IBM PC - PC-TEX; to print on PostScript 300DPI; pages: 25 ; figures: included
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Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwpga:9609003

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