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Incentives and Political Economy$
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Jean-Jacques Laffont

Print publication date: 2001

Print ISBN-13: 9780199248681

Published to Oxford Scholarship Online: November 2003

DOI: 10.1093/0199248680.001.0001

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PRINTED FROM OXFORD SCHOLARSHIP ONLINE (oxford.universitypressscholarship.com). (c) Copyright Oxford University Press, 2020. All Rights Reserved. An individual user may print out a PDF of a single chapter of a monograph in OSO for personal use. date: 25 November 2020

Collusion and Decentralization

Collusion and Decentralization

(p.207) 9 Collusion and Decentralization
Incentives and Political Economy

Jean‐Jacques Laffont (Contributor Webpage)

Oxford University Press

This chapter models the optimal degree of delegation and centralization of government as the degree of availability of communication between periphery and centre in a hierarchy. Under bounded rationality, delegation is shown to be superior as it uses more information than centralization. Under delegation with risk‐averse agents, it is shown that new transaction costs are introduced since the risk‐averse agent will require a risk premium for incentive compatibility.

Keywords:   bounded rationality, centralization, communication, delegation, government, hierarchy, incentive compatibility, risk premium, risk‐aversion, transaction costs

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