Bargaining and collusion in a regulatory relationship
نویسندگان
چکیده
We investigate regulation as the outcome of a bargaining process between a regulator and a regulated firm. The regulator is required to monitor the firm’s costs and reveal its information to a political principal (Congress). In this setting, we explore the scope for collusion between the regulator and the firm, which results in the manipulation of the regulator’s report on the firm’s costs to Congress. The firm’s benefit of collusion arises from the higher price the effi cient firm is allowed to charge when the regulator reports that it is ineffi cient. However, a higher price reduces the gains from trade the parties can share in the bargaining process. As a result of this trade-off, the effi cient firm has a stake in collusion only if the regulator’s bargaining power in the regulatory relationship is relatively high. Then, we derive the optimal institutional response to collusion and characterize the conditions under which allowing collusion is desirable.
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