Collusion-Proof Yardstick Competition
AbstractThis 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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Bibliographic InfoPaper provided by Stockholm University, Institute for International Economic Studies in its series Seminar Papers with number 674.
Length: 39 pages
Date of creation: 12 Nov 1999
Date of revision:
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Postal: Institute for International Economic Studies, Stockholm University, S-106 91 Stockholm, Sweden
Web page: http://www.iies.su.se/
More information through EDIRC
Yardstick competition; collusion; regulation;
Other versions of this item:
- L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2000-01-24 (All new papers)
- NEP-IND-2000-01-24 (Industrial Organization)
- NEP-MIC-2000-01-24 (Microeconomics)
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