infonet-economy

Economic literature has proposed several incentive mechanisms in order to induce agents in divisionalized organizations to reveal their private information. Among these mechanisms the class of Groves mechanisms has the distinguishing property of implementing truthful reporting as an equilibrium in dominant strategies. However, critiques maintain that agents may collude and transmit false information to headquarters. This paper demonstrates that the agents' collusion game results in a prisoners' dilemma because agents cannot credibly commit themselves to play the collusive message strategies. The paper also outlines an organizational setting to enhance the plausibility of the fundamental assumptions underlying the Groves/Loeb approach, in which payoffs are observable ex post so that compensation contracts can be based on them. The task of informing headquarters is not assigned to the division manager himself but to a pertinent management accountant. This setting reduces the impact of subjective utility components of agents' payoffs so that the assumptions of this mechanism seem more realistic.