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Mechanism Design under Collusion and Uniform Transfers

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  • Doh-Shin Jeon

Abstract

In this paper, we study mechanism design under collusion and uniform transfers focusing on the transaction costs in coalition formation created by asymmetric information among agents. We are particularly interested in the interaction between incompleteness of contracts and collusion: in our setting, the regulator (the principal) is constrained to use uniform transfers and this gives rise to room for collusion between the regulated firms. Collusion takes place under adverse selection and moral hazard since each firm's cost, observable to the regulator, is determined by its efficiency parameter and by its effort, which are the firm's private information. We first show that when the gains from collusion are smaller than a threshold, the firms fail to realize the gains because of the transaction costs created by asymmetric information. When the gains are larger than the threshold, we characterize the optimal collusion-proof mechanism which fully exploits the transaction costs. Finally, we show that when the regulator is constrained to use uniform transfers, the collusion-proofness principle does not hold.

Suggested Citation

  • Doh-Shin Jeon, 2003. "Mechanism Design under Collusion and Uniform Transfers," Working Papers 37, Barcelona School of Economics.
    • Handle: RePEc:bge:wpaper:37
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    Cited by:

    1. Gorkem Celik & Dongsoo Shin & Roland Strausz, 2023. "Aggregate Information and Organizational Structures," Journal of Industrial Economics, Wiley Blackwell, vol. 71(1), pages 256-290, March.
    2. Jansen, Jos & Jeon, Doh-Shin & Menicucci, Domenico, 2008. "The organization of regulated production: Complementarities, correlation and collusion," International Journal of Industrial Organization, Elsevier, vol. 26(1), pages 327-353, January.

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    More about this item

    Keywords

    Collusion; Asymmetrion information; transaction cost; uniform transfers;
    All these keywords.

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior

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