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Bargaining and Collusion in a Regulatory Model

Raffaele Fiocco () and Mario Gilli ()

SFB 649 Discussion Papers from Humboldt University, Collaborative Research Center 649

Abstract: Within a standard three-tier regulatory model, a benevolent prin- cipal delegates to a regulatory agency two tasks: the supervision of the …rm’s (two-type) costs and the arrangement of a pricing mecha- nism. The agency may have an incentive to manipulate information to the principal to share the gains of collusion with the …rm. The novelty of this paper is that both the regulatory mechanism and the side contracting between the agency and the …rm are modelled as a bargaining process. While as usual the ine¢ cient …rm does not have any interest in cost manipulation, we …nd that the e¢ cient …rm has an incentive to collude only if the agency’s bargaining power is high enough, and the total gains of collusion are now lower than those the two partners would appropriate if the agency could make a take-it-or- leave-it o¤er. Then, we focus on the optimal institutional responses to the possibility of collusion. In our setting, where the incomplete- ness of contracts prevents the principal from designing of a screening mechanism and thus Tirole’s equivalence principle does not apply, we show how the players’bargaining powers crucially drive the optimal response to collusion.

Keywords: bargaining; collusion; regulation (search for similar items in EconPapers)
JEL-codes: D73 D82 L51 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2011-07
New Economics Papers: this item is included in nep-cta and nep-reg
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Related works:
Chapter: Bargaining and Collusion in a Regulatory Model (2012) Downloads
Working Paper: Bargaining and Collusion in a Regulatory Model (2011) Downloads
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