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Collusion Under Asymmetric Information: The Role of the Correlation

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  • Jérôme Pouyet

Abstract

We consider the regulation of a duopoly under incomplete information. When firms act noncooperatively, the regulator uses yardstick mechanisms to bridge his informational gap at no cost. However, this provides the firms with an incentive to collude. We interpret the correlation as a measure of the congruence/divergence between individual and coalitional incentives. Under positive correlation, these incentives are aligned: the threat of collusion forces the regulator to distort the allocation. Under negative correlation, these incentives are opposed: the regulator can, sometimes, exploit this conflict of interest inside the coalition to eradicate the stakes of collusion at no cost.

Suggested Citation

  • Jérôme Pouyet, 2002. "Collusion Under Asymmetric Information: The Role of the Correlation," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 4(4), pages 543-572, October.
    • Handle: RePEc:bla:jpbect:v:4:y:2002:i:4:p:543-572
    DOI: 10.1111/1097-3923.00109
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    Cited by:

    1. Cecile Aubert & Jerome Pouyet, 2000. "Collusion Under Asymmetric Information and Institutional Incompleteness," Econometric Society World Congress 2000 Contributed Papers 0806, Econometric Society.
    2. Sara Biancini, 2010. "Incomplete Regulation, Competition, and Entry in Increasing Returns to Scale Industries," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 12(6), pages 1003-1026, December.
    3. Jansen, Jos & Jeon, Doh-Shin & Menicucci, Domenico, 2008. "The organization of regulated production: Complementarities, correlation and collusion," International Journal of Industrial Organization, Elsevier, vol. 26(1), pages 327-353, January.
    4. Dawen Meng & Guoqiang Tian & Zhe Yang, 2017. "Two-agent collusion-proof implementation with correlation and arbitrage," Review of Economic Design, Springer;Society for Economic Design, vol. 21(3), pages 177-229, September.

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