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Bargaining and collusion in a regulatory relationship

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  • Raffaele Fiocco
  • Mario Gilli

Abstract

We investigate regulation as the outcome of a bargaining process between a regulator and a regulated firm. The regulator is required to monitor the firm’s costs and to reveal its information to a political principal (Congress). In this setting, we explore the scope for collusion between the regulator and the firm, which results in the manipulation of the regulator’s report on the firm’s costs to Congress. The firm’s benefit of collusion arises from the higher price the efficient firm is allowed to charge when the regulator reports that it is inefficient. However, a higher price reduces the gains from trade the parties can share in the bargaining process. As a result of this trade-off, the efficient firm has a stake in collusion only if the regulator’s bargaining power in the regulatory relationship is relatively high. Then, we derive the optimal institutional response to collusion and characterize the conditions under which allowing collusion is desirable. Copyright Springer-Verlag Wien 2016

Suggested Citation

  • Raffaele Fiocco & Mario Gilli, 2016. "Bargaining and collusion in a regulatory relationship," Journal of Economics, Springer, vol. 117(2), pages 93-116, March.
    • Handle: RePEc:kap:jeczfn:v:117:y:2016:i:2:p:93-116
    DOI: 10.1007/s00712-015-0456-2
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    More about this item

    Keywords

    Asymmetric information; Auditing; Bargaining; Collusion; Regulation; D73; D82; L51;
    All these keywords.

    JEL classification:

    • D73 - Microeconomics - - Analysis of Collective Decision-Making - - - Bureaucracy; Administrative Processes in Public Organizations; Corruption
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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