Collusion in Organizations and Management of Conflicts through Job Design and Authority Delegation

Abstract

We analyze a principal-supervisor-two agent hierarchy with supervisory efforts, provide a characterization of the equilibrium of the game, and show which regime improves efficiency between the collusion-proof regime and the lateral collusion one, under the assumptions that the principal is less informed, and that the side-trade is costly. By coping with the trade-off between the value of information vs. either the cost of the collusion incentive constraint (in the collusion-proof regime) or the rent-seeking cost (in the equilibrium collusion one), for some parameters, the principal may want to adopt the collusion-proof contracts, and for other parameters, let collusion happen in equilibrium. As a characterization result, we derive the low-powered job for the agent and the high-powered job for the supervisor in each of the two regimes. Finally, we show how the allocation of real authority is endogenously determined, and interpret it from the viewpoint of the centralized vs. decentralized firms.