Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/103895
Authors: 
Fiocco, Raffaele
Gilli, Mario
Year of Publication: 
2014
Series/Report no.: 
SFB/TR 15 Discussion Paper 466
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 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 bene.t 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.
Subjects: 
asymmetric information
auditing
bargaining
collusion
regulation
JEL: 
D73
D82
L51
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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