Template-Type: ReDIF-Paper 1.0
Title: Sweet Lemons: Mitigating Collusion in Organizations
Author-Name: Colin von Negenborn
Author-Email: von.negenborn@hu-berlin.de
Author-Name: Martin Pollrich
Author-Email: martin.pollrich@uni-bonn.de
Classification-JEL: D82, D83, L51
Keywords: Mechanism Design, Collusion, Correlation, Asymmetric Information, Random Incentives

Abstract: We show that mechanisms which generate endogenous asymmetric information fully mitigate collusion.
In our model, an agent has private information and a supervisor observes a signal that is correlated
with the agent’s type. Agent and supervisor can form collusive side agreements. We study the
implementation of social choice functions that condition on the agent’s type and the supervisory signal.
Our main result establishes that any social choice function that is implementable if the signal is public
can also be implemented when the signal is private information and collusion is possible. Despite
collusion, the signal is obtained for free, i.e., the supervisor does not receive an information rent. Our
mechanism breaks collusion via endogenous creation of asymmetric information between agent and
supervisor. The associated bargaining frictions prevent formation of collusive agreements, similar to
the trade failure in the classical lemons market.

Note: 
Length: 36
Creation-Date: 2020-02
Revision-Date: 
File-URL: https://www.crctr224.de/research/discussion-papers/archive/dp019
File-Format: application/pdf
Handle: RePEc:bon:boncrc:CRCTR224_2018_019v2