Failure to collude in the presence of asymmetric information

Doh-Shin Jeon

Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra

Abstract: In this paper, we design the optimal contract when two agents can collude under asymmetric information. They have correlated types, produce complementary inputs and are protected by limited liability. Therefore, a joint manipulation of reports allows them to internalize informational and productive externalities. We show that by taking advantage of the transaction costs created by asymmetric information, even though they collude, the principal can achieve the outcome without collusion regardless of the sign and the degree of correlation. In particular, the principal can implement a non-monotonic quantity schedule in a collusion-proof way while this is impossible if collusion occurs under complete information.

Keywords: Asymmetric information; transaction costs; limited liability; side-contract; collusion-proofness; virtual cost (search for similar items in EconPapers)
JEL-codes: D8 L2 (search for similar items in EconPapers)
Date: 2001-08, Revised 2005-06
New Economics Papers: this item is included in nep-ent, nep-gth and nep-net
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:upf:upfgen:574

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