Collusion and group lending with adverse selection

In an environment with correlated returns, this paper characterizes optimal lending contracts when the bank faces adverse selection and borrowers have limited liability. Group lending contracts are shown to be dominated by revelation mechanisms which do not use the ex post observability of the partners' performances. However, when collusion between borrowers under complete information is allowed, group lending contracts are optimal in the class of simple revelation mechanisms (which elicit only the borrower's own private information) and remain useful with extended revelation mechanisms.     

Sequential location equilibria under incomplete information

Summary We consider a simple model of incomplete information in location theory. Two firms compete in a two stage framework: a sequential location stage and a price competition stage. Firm 1 knows both its own constant marginal cost technology and that of Firm 2, whereas the latter has incomplete information about firm 1's technology. The location stage turns out to be a monotonic signaling game and theunique D1 equilibrium is a pure strategy separating equilibrium if firm 1's cost advantage is below some bound, and otherwise a pooling equilibrium if the prior probability that Firm 1 is of the low cost type is high, or a semi-pooling equilibrium if it is low. This surprising result is due to the fact that the location gap between the two types of Firm 1 is bounded because of natural economic reasons, which may prevent the separation of the two types. Hence, incomplete information matters: the equilibrium locations differ quite significantly from the full information equilibrium locations.We would like to thank an anonymous referee for very helpful comments and also the participants in seminars at GREQE (Marseille), Université de Montréal, UBC, HEC (Paris), in the Location Theory session of the World Congress of the Econometric Society (Barcelona) and in the Game Theory Conference at the University of Western Ontario for their comments. We remain, of course, solely responsible for the content of the paper. Financial support from FCAR (Québec), SSHRCC (Canada) and CNRS (France) is gratefully acknowledged.     

Collusion, Delegation and Supervision with Soft Information

This paper shows that supervision with soft information is valuable whenever supervisors and supervisees collude under asymmetric information and proceeds then to derive an Equivalence Principle between organizational forms of supervisory and productive activities. We consider an organization with an agent privately informed on his productivity and a risk averse supervisor getting signals on the agent's type. In a centralized organization, the principal can communicate and contract with both the supervisor and the agent. However, these two agents can collude against the principal. In a decentralized organization, the principal only communicates and contracts with the supervisor who in turn sub-contracts with the agent. We show that the two organizations achieve the same outcome. We discuss this equivalence and provide various comparative statics results to assess the efficiency of supervisory structures.     

Incentive Regulation and The Cost Structure of The Local Telephone Exchange Network

This paper combines an engineering process model of the cost of local exchange telecommunications firms with an analytical model of optimal incentive regulation (with ex post cost observability), to study empirically the properties of the optimal regulatory mechanism. Relying on detailed properties of the cost function, we examine three issues: (i) the extent of natural monopoly when informational rents associated with regulation are taken into account; (ii) the extent of incentive correction, which expresses the divergence of pricing under the optimal mechanism from optimal pricing under complete information; (iii) the implementation of optimal regulation through a menu of linear contracts. Our findings are that, for fixed territory, strong economies of scale allow local exchange telecommunications to retain monopoly characteristics even when the (informational) costs of regulation are properly accounted for, the incentive correction term is small in magnitude, and that optimal regulation can be well approximated through relatively simple linear contracts.     

Regulation of a Risk Averse Firm

We extend the Laffont–Tirole regulation model to the case of risk-averse firms. Our main results are:

• The impact of risk aversion is to shift the optimal contract toward a cost-plus contract.

• As compared with the risk-neutral case, distortions are greater and informational rents are smaller.

• For high levels of risk aversion, the optimal contract involves cost ceilings and the less efficient firms are bunched together.

Journal of Economic LiteratureClassification Numbers: D8, L5.     

Collusion-Proof Samuelson Conditions for Public Goods

We analyze a public good problem when agents form a grand coalition to promote their own collective goal instead of that of society as a whole. When collusion takes place under symmetric information , the collusion-proof Samuelson rule takes a simple form that is close to an ex ante cost-benefit analysis . Then, we analyze the case where agents collude under asymmetric information . First, we describe the set of collusion-proof allocations. Second, we establish the collusion-proof Samuelson rule that highlights the role of coalitional virtual valuations . Asymmetric information within the coalition allows the principal to recover some flexibility in the design of the optimal policy. We finally discuss the nature of the inefficiency created by the agents' collusive behavior and the scope of their ex ante gain in forming a coalition.     

The Firm as a Multicontract Organization

The firm is often considered as a nexus of contracts linking the management and its different stakeholders: claim-holders, workers, unions, customers, suppliers, and the state, among others. This paper surveys recent work in contract theory, the multiprincipal incentive theory, and the theory of side contracts, which provides some insights into the structure of those contracts and therefore into the structure of the firm. First, we discuss the incomplete contracting assumptions underlying these variations of the usual grand contract approach. Second, we explain how the theoretical lessons learned from this work—the distribution of contracting rights, the power of incentive schemes within organizations, and the design of communication channels—apply to the theory of the firm.     

Reciprocal Supervision,Collusion and Organizational Design

We study the design of supervisory functions in an organization with one principal and two agents. Each agent can perform supervision activities regarding the other agent. We characterize the way the principal must structure incentive payments to avoid any collusive activity between agents. In particular, it is shown that better mutual information between agents may hurt the principal. The other main result is the possibility that it may be better to give up one supervisory function or to have a third party be the supervisor if possible. Finally, we show that such a dual supervisory structure raises the possibility that letting collusion happen may be the best policy.