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Therefore, when side contracting between the agents is possible, the principal does not need to worry about the potential situation in which one of the agents misreports his type when both agents are [[beta].
In summary, when the agents can collude, the principal designs a contract such that an efficient agent misreports his type unless an inefficient agent pays a side transfer when they face each other.
L], one of them may misreport his type in attempt to free ride on the other agent.
The positive externality between the different agents resulting from wage compression generates an incentive problem when both agents are efficient types--an efficient agent has an incentive to misreport his type to free ride on the other efficient agent.
With the possibility of side contracting, the agents would cooperatively misreport their types if their joint payoff would improve by doing so.
The RHS of a CIC is the joint payoff of the agents when one or both of them misreport his/ their type(s) with side contracting, and the CICs prevent all combinations of misreporting.