Implicit Collusion in Non-Exclusive Contracting under Adverse Selection

Posted by D. Daniel Sokol

Seungjin Han, McMaster University addresses Implicit Collusion in Non-Exclusive Contracting under Adverse Selection.

ABSTRACT: This paper studies how implicit collusion may take place in non-exclusive contracting under adverse selection when multiple agents (e.g., entrepreneurs with risky projects) non-exclusively trade with multiple firms (e.g., banks). It introduces the notion of the dual-additive price schedule, which makes agents non-exclusively trade with firms in the market without arbitrage opportunities. It then shows that any dual-additive price schedule can be supported as equilibrium terms of trade in the market if each firm's expected profit is no less than its reservation profit. Firms sustain collusive outcomes through triggering trading mechanisms in which they change their terms of trade contingent only on agents' reports on the lowest average price that the deviating firm's trading mechanism would induce.