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Collusion-Proof Yardstick Competition

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Author Info
Tangerås, Thomas P. () (The Research Institute of Industrial Economics, IUI)

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Abstract

This paper analyses the incentives for collusion when an industry is regulated by means of yardstick competition. The central assumption is that firms must write collusive side contracts before the revelation of private information and are unable to communicate later. It is shown that optimal collusion-proof regulation demands more high-powered (low-powered) incentives to high-productivity (low-productivity) firms than prescribed by the second-best contract. Collusion is costly to society also when correlation of private information is near perfect. This contrasts with the result by Laffont and Martimort (1998b), that the cost of collusion vanishes in the limit.

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Publisher Info
Paper provided by Stockholm University, Institute for International Economic Studies in its series Seminar Papers with number 674.

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Length: 39 pages
Date of creation: 12 Nov 1999
Date of revision:
Handle: RePEc:hhs:iiessp:0674

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Postal: Institute for International Economic Studies, Stockholm University, S-106 91 Stockholm, Sweden
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Related research
Keywords: Yardstick competition; collusion; regulation;

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Find related papers by JEL classification:
L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Cowan, Simon, 1997. "Competition in the Water Industry," Oxford Review of Economic Policy, Oxford University Press, vol. 13(1), pages 83-92, Spring.
  2. Emmanuelle Auriol, 1993. "Monopole ou duopole: l'effet de comparaison," Annales d'Economie et de Statistique, ADRES, issue 31, pages 01, Juillet-S. [Downloadable!]
  3. Jean-Jacques Laffont & David Martimort, 1998. "Collusion and Delegation," RAND Journal of Economics, The RAND Corporation, vol. 29(2), pages 280-305, Summer. [Downloadable!] (restricted)
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  4. Andrei Shleifer, 1985. "A Theory of Yardstick Competition," RAND Journal of Economics, The RAND Corporation, vol. 16(3), pages 319-327, Autumn. [Downloadable!] (restricted)
  5. Dag Morten Dalen, 1998. "Yardstick Competition and Investment Incentives," Journal of Economics & Management Strategy, Blackwell Publishing, vol. 7(1), pages 105-126, 03. [Downloadable!] (restricted)
  6. Mark Armstrong & Simon Cowan & John Vickers, 1994. "Regulatory Reform: Economic Analysis and British Experience," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262510790.
  7. Auriol, Emmanuelle & Laffont, Jean-Jacques, 1992. "Regulation by Duopoly," IDEI Working Papers 20, Institut d'Économie Industrielle (IDEI), Toulouse.
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  8. Demski, Joel S. & Sappington, David, 1984. "Optimal incentive contracts with multiple agents," Journal of Economic Theory, Elsevier, vol. 33(1), pages 152-171, June. [Downloadable!] (restricted)
  9. Laffont, Jean-Jacques & Martimort, David, 1998. "Mechanism Design with Collusion and Correlation," IDEI Working Papers 81, Institut d'Économie Industrielle (IDEI), Toulouse. [Downloadable!]
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  10. Jean-Jacques Laffont & David Martimort, 1997. "Collusion under Asymmetric Information," Econometrica, Econometric Society, vol. 65(4), pages 875-912, July.
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  11. Joel Sobel, 1999. "A Reexamination of Yardstick Competition," Journal of Economics & Management Strategy, Blackwell Publishing, vol. 8(1), pages 33-60, 03. [Downloadable!] (restricted)
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  12. Bengt Holmstrom, 1982. "Moral Hazard in Teams," Bell Journal of Economics, The RAND Corporation, vol. 13(2), pages 324-340, Autumn. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Marco Meireles & Paula Sarmento, 2009. "Incomplete Regulation, Asymmetric Information and Collusion-Proofness," FEP Working Papers 320, Universidade do Porto, Faculdade de Economia do Porto. [Downloadable!]
  2. Roberta Longo & Marisa Miraldo & Andrew Street, 2008. "Price regulation of pluralistic markets subject to provider collusion," Working Papers 045cherp, Centre for Health Economics, University of York. [Downloadable!]
    Other versions:
  3. Anna Bottasso & Maurizio Conti, 2003. "Cost Inefficiency in the English and Welsh Water Industry: An Heteroskedastic Stochastic Cost Frontier Approach," Economics Discussion Papers 573, University of Essex, Department of Economics. [Downloadable!]
  4. Georg Meran & Christian von Hirschhausen, 2006. "A Modified Yardstick Competition Mechanism," Working Papers 2006-05, Center for Network Industries and Infrastructure (CNI). [Downloadable!]
    Other versions:
  5. Martine M. Bellanger & Philippe R. Mossé, 2005. "The search for the Holy Grail: combining decentralised planning and contracting mechanisms in the French health care system," Health Economics, John Wiley & Sons, Ltd., vol. 14(S1), pages S119-S132. [Downloadable!]
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