Regulatory mechanism design with extortionary collusion

Dilip Mookherjee and Masatoshi Tsumagari

Journal of Economic Theory, 2023, vol. 208, issue C

Abstract: We study regulatory mechanism design with collusion between a privately informed agent and a less well-informed supervisor, incorporating ‘extortion’ which permits redistribution of rents within the coalition. We show the Collusion Proof Principle holds, and that the allocation of bargaining power between the supervisor and agent matters. Specifically, the Principal does not benefit from hiring the supervisor if the latter has less bargaining power vis-a-vis the agent. We provide an example where hiring the supervisor is valuable if she has greater bargaining power. These results indicate the importance of anti-collusion strategies that augment bargaining power of supervisors vis-a-vis agents.

Keywords: Mechanism design; Supervision; Collusion; Extortion; Bargaining power (search for similar items in EconPapers)
JEL-codes: D82 D86 L23 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:208:y:2023:i:c:s0022053123000108

DOI: 10.1016/j.jet.2023.105614

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