ABSTRACT
A common thread ties principal–agent and cartel problems, the dilemma of cooperation. Both the agents and the principal could gain by trusting each other. The principal could save the cost of inspecting the agents, but it is somewhat more complicated for the agents. Their expected return in a Cournot–Nash equilibrium is zero because their expected gain from dishonesty is offset by the expected penalty imposed if cheating is detected and punished. Yet an agent who knows the principal will not inspect, finds irresistible the temptation of gain from cheating in these models. Therefore, although cheating does not raise the agent’s average return, the noncooperative equilibrium mixes cheating and honesty to yield a zero average gain. It is similar for a cartel. Firms can maximize their joint profit by collusion. Should one or more cut prices, it can gain more than its payoff under the joint profit maximum although this would reduce the total of everybody’s profit. Yet the lure of gain in the Cournot–Nash equilibrium is irresistible so the firms cut prices. The outcome is a pure Cournot–Nash equilibrium in which each each firm gets less than in the joint profit maximum but loses less than as a victim of one or more price cutters. Consequently, cartels also pose the dilemma of cooperation.
