Collusion, Blackmail and Whistle-Blowing

37 Pages Posted: 19 May 2015

See all articles by Leonardo Felli

Leonardo Felli

University of Cambridge, Faculty of Economics; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR)

Rafael Hortala-Vallve

London School of Economics & Political Science (LSE) - Department of Government

Date Written: May 19, 2015

Abstract

Whistle-blowing is usually regarded as a way to identify abuse and wrongdoing on the part of governments and corporations. In this paper we show how, at a micro level, whistle-blowing can be used as a designer tool to prevent opportunistic behavior, that takes the form of collusion or blackmail, on the part of members of a simple hierarchical structure. We focus on a three layered principal-supervisor-agent structure and show how the principal can use whistle-blowing as a way to prevent the supervisor and the agent from colluding to the detriment of the principal. To understand our mechanism we need to explicitly define the penalty a party has to incur for walking away from a collusive agreement. Rewarding whistle-blowing, creates incentives for the uninformed colluding party to walk out of the side deal and report to the principal that collusion took place. This threat clearly reduces the informed party’s incentive to participate in side deals. It also serves as a potential blackmail threat between the colluding parties. However, careful use of whistle-blowing allows the principal to eliminate opportunities for blackmail.

Keywords: collusion, blackmail, whistle-blowing and communication

JEL Classification: D730, D780, D830

Suggested Citation

Felli, Leonardo and Hortala-Vallve, Rafael, Collusion, Blackmail and Whistle-Blowing (May 19, 2015). CESifo Working Paper Series No. 5343, Available at SSRN: https://ssrn.com/abstract=2607908 or http://dx.doi.org/10.2139/ssrn.2607908

Leonardo Felli

University of Cambridge, Faculty of Economics ( email )

Austin Robinson Building
Sidgwick Avenue
Cambridge, CB3 9DD
United Kingdom
+44 1223 335221 (Phone)

HOME PAGE: http://www.felli.info

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Rafael Hortala-Vallve (Contact Author)

London School of Economics & Political Science (LSE) - Department of Government ( email )

Northampton NN7 1NE
United Kingdom

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