Discussion Paper Details

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Title: Preventing Collusion through Discretion

Author(s): Leonardo Felli and Rafael Hortala-Vallve

Publication Date: March 2011

Keyword(s): Collusion, Communication, Delegation and Hierarchies

Programme Area(s): Industrial Organization

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.

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Bibliographic Reference

Felli, L and Hortala-Vallve, R. 2011. 'Preventing Collusion through Discretion'. London, Centre for Economic Policy Research.