A Dynamic Model of Collusion

Daron Acemoglu

No 1027, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: A monitor is hired to control the agent. Despite the lack of side-contracting opportunities it is shown that the agent and the monitor can collude. The conditions for such implicit collusion are that the monitor should expect future rents from a continued relationship and the agent should have the authority to influence these rents and a credible threat to do so. The paper shows that the credibility of the agent's threat depends on how the principal will interpret a disagreement between the agent and the monitor, which in turn depends on whether the principal expects collusion to take place. The dynamic model of collusion we offer fits the accounts of lawyers, sociologists and auditors on the nature of collusion and it enables us to ask and answer some new questions. First, the extent of collusion will depend on the monopoly power (rents) of the monitors. Second, in contrast to a static model with explicit side-contracts, using the threat of lawsuits combined with a flat fee for the monitor rather than bonuses may be the optimal method of controlling the monitor. Third, the behaviour of the current monitor will depend on the expected behaviour of other monitors and thus a multiplicity of equilibria is possible. Fourth, the number of tasks that the monitor has may influence the possibility of collusion. Finally, our model can be used to jointly determine the allocation of authority and the reliability of information flows within the organization.

Keywords: Career Concerns; Implicit Collusion; Monitoring Collusion; Threat of Lawsuits (search for similar items in EconPapers)
JEL-codes: L22 (search for similar items in EconPapers)
Date: 1994-09
References: Add references at CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://www.cepr.org/active/publications/discussion_papers/dp.php?dpno=1027 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:1027

Ordering information: This working paper can be ordered from
http://www.cepr.org/ ... ers/dp.php?dpno=1027

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().