Preventing Collusion through Discretion

Leonardo Felli and Rafael Hortala-Vallve

No 8302, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: Large public bureaucracies are commonly regarded as less efficient than modern private corporations. This paper explores how the degree of discretionary power might account for this difference in efficiency. Indeed, increasing the discretionary power of the intermediate layers of an organization - delegating power to them - enhances productivity by preventing collusion and capture between middle managers and line workers; provided that this detrimental form of collusion takes place in conditions of asymmetric information. To understand how this mechanism works requires an explicit model of the penalty for breach of a collusive agreement a party has to incur to walk away from such a side deal. Delegation is then a simple way for the principal to compensate the uninformed colluding party for walking out of collusion and for using/reporting the information leaked in the collusive negotiation. This threat clearly reduces the informed party incentive to participate in side deals and prevents collusion at a reduced cost.

Keywords: Collusion; Communication; Delegation; Hierarchies (search for similar items in EconPapers)
JEL-codes: D73 D78 D83 (search for similar items in EconPapers)
Date: 2011-03
New Economics Papers: this item is included in nep-cta
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Citations: View citations in EconPapers (3)

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Working Paper: Preventing Collusion Through Discretion (1996)
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