COLLUSION AND DELEGATION

We discuss the internal organization of the firm, arguing that the com parison between a centralized and a decentralized hierarchical organiz ation should be cast in terms of the agency costs associated with the different side-contracting games that agents play in these organizatio ns. In our model, with no limits on communication between the agents a nd the principal (complete contracting), collusion is not an issue in a centralized organization. Centralization always dominates (at least weakly) delegation. With limits on communication (incomplete contracti ng), collusion may have some bite under centralization. Limits on comm unication introduce an anonymity condition on the contract, creating a conflict between participation and coalition incentive constraints un der centralization. By shifting the bargaining power in the side-contr acting stage, delegation is nonanonymous and asymmetric by design. Thi s conflict is then avoided or diminished depending on the exact timing of the delegation game.