'Friendships' in Vertical Relations

Posted: 6 Nov 1996

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)

J. Miguel Villas-Boas

University of California, Berkeley

Date Written: Undated

Abstract

It has been argued that collusion among the members of an organization or a vertical structure creates efficiency losses and, hence, should be prevented. This paper shows that whenever collusion takes the form of co-insurance agreements, here called "friendships," among the members of a vertical structure this may not be the case. Indeed, in such a case collusion yields only a redistribution of surplus among the members of the vertical structure. Hence, its efficiency costs may be reduced by allowing these "friendships" to take place, rather than preventing them, and accounting for the redistribution in the design of the optimal incentive scheme.

JEL Classification: D23, L22

Suggested Citation

Felli, Leonardo and Villas-Boas, J. Miguel, 'Friendships' in Vertical Relations (Undated). Available at SSRN: https://ssrn.com/abstract=4397

Leonardo Felli (Contact Author)

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

J. Miguel Villas-Boas

University of California, Berkeley ( email )

Haas School of Business
Berkeley, CA 94720
United States
510-642-1250 (Phone)
510-643-1420 (Fax)

Do you have negative results from your research you’d like to share?

Paper statistics

Abstract Views
993
PlumX Metrics