Delegation contracts’ observability and collusion

Co-operation is easier to attain, when the players are able to observe each other. Contracts, like other institutions, can be used by economic agents to become more observable, state their intentions and define their role. In this chapter, we analyse the possibility that incentive contracts for delegates could be used by principals to sustain co-operation, studying an application to Cournot oligopoly. It is shown that collusion is a sub-game perfect equilibrium of a Cournot duopoly game between two firms, where, as in the previous chapter, the choice of output is delegated by each owner to a manager, and the managers’ incentive schemes are observable and renegotiable.