Wednesday, August 24, 2011
Posted by D. Daniel Sokol
Rocco Ciciretti, University of Rome II - Department of Financial and Quantitative Economics, Simone Meraglia, University of Toulouse 1 - Toulouse School of Economics (TSE) and Gustavo Piga, University of Rome have an interesting paper on Capture, Politics and Antitrust Effectiveness.
ABSTRACT: We study a three-tier hierarchy Political Principal - Competition Authority - Firms in which the Principal chooses the Authority's (i) exante budget, (ii) state-contingent transfer, and (iii) preferences in presence of moral hazard. Collusion between the Authority and firms may arise so as to avoid fines. For high efficiency levels of side-contracting, collusion proofness induces high-powered incentives for the Authority. The Principal trades-off the benefits from allowing the Authority to exert its desired level of effort with the cost of leaving it an increasing expected rent. This results in the budget being non-monotone in the side-contracting efficiency level. When firms bribe the Principal for a reduced budget, both the budget and the state-contingent transfer are non-increasing in the side-contracting efficiency level. Instances in which the Authority is optimally allocated a zero budget are characterized. Finally we show that the Principal prefers a consumers' surplus maximizing Competition Authority.