UC Santa Cruz

In 2005 a company in charge of repairing electric transmission towers made a deal with guerrilla militants to demolish the towers. This company thrived, because the attacks were attributed to guerrilla groups, who commit these attacks often. However, the number of attacks increased significantly, raising alarms and leading to the discovery of the plot. We model this situation as a game between contractors and the power transmission company, and show how misaligned incentives enabled contractors to profit by colluding with guerrilla groups. We also analyze how to modify the contractual policies reducing the incentives to collude with guerrillas. In particular, the transmission company can prevent attacks by creating competition and exploiting market inefficiencies.