Quarterly Journal of Political Science > Vol 11 > Issue 3

Collusion, Blackmail and Whistle-Blowing

Leonardo Felli, London School of Economics, UK, lfelli@econ.lse.ac.uk Rafael Hortala-Vallve, London School of Economics, UK, r.hortala-vallve@lse.ac.uk
 
Suggested Citation
Leonardo Felli and Rafael Hortala-Vallve (2016), "Collusion, Blackmail and Whistle-Blowing", Quarterly Journal of Political Science: Vol. 11: No. 3, pp 279-312. http://dx.doi.org/10.1561/100.00015060

Published: 31 Oct 2016
© 2016 L. Felli and R. Hortala-Vallve
 
Subjects
Industrial Organization: Theory of the Firm,  Economic Theory: Microeconomic Theory,  Bureaucracy,  Game theory,  Interest groups,  Public administration
 
Keywords
Collusionblackmailwhistle-blowingorganizationsmechanism designcommunicationopportunistic behavior
 

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In this article:
1. Related Literature
2. The Model
3. The Possibility of Collusion
4. The Collusion-Proof Optimal Mechanism
5. Blackmail
6. Concluding Remarks
Appendix
References

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.

DOI:10.1561/100.00015060