Tripartite Income-Employment Contracts and Coalition Incentive Compatibility

Murray Brown and Elmar Wolfstetter

RAND Journal of Economics, 1989, vol. 20, issue 3, 291-307

Abstract: Tripartite contracts between workers, a firm, and an insurance broker Pareto dominate the usual bilateral arrangements if coalitions are not feasible. They do this by allowing the broker to run surpluses over a reservation expected utility in some states and deficits in others. We show that these contracts are manipulable by coalitions. This motivates our main contribution -- the definition and characterization of coalition incentive compatible tripartite contracts. We then ask whether broker intermediation can still be useful. The answer is that not every coalition incentive compatibility requirement annuls the critical budget-breaking property. Specifically, if firm-broker coalitions are feasible, there is no three-party contract that is coalition incentive compatible and Pareto superior to bilateral firm-worker contracts, except in the extreme case where the workers' demand for leisure is income inelastic But if only a firm-worker coalition can form, the addition of a broker to a bilateral arrangement does reduce the welfare losses caused by the existence of asymmetric information.

Date: 1989
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