David Martimort

COLLUSION UNDER ASYMMETRIC INFORMATION

When applied to groups, the revelation principle postulates a Bayesian-Nash behavior between agents. Their binding agreements are unenforceable or the principal can prevent them at no cost. The authors analyze instead a mechanism design problem in which the agents can communicate between themselves and collude under asymmetric information. They characterize the set of implementable collusion-proof contracts both when the principal offers anonymous and nonanonymous contracts. After having isolated the nexi and the stakes of collusion, the authors proceed to normative analysis, do some comparative statics, discuss their concept of collusion-proofness, and provide some insights about transaction costs in side-contracting.

COMPETING MECHANISMS IN A COMMON VALUE ENVIRONMENT

Consider strategic risk-neutral traders competing in schedules to supply liquidity to a risk-averse agent who is privately informed about the value of the asset and his hedging needs. Imperfect competition in this common value environment is analyzed as a multi-principal game in which liquidity suppliers offer trading mechanisms in a decentralized way. Each liquidity supplier behaves as a monopolist facing a residual demand curve resulting from the maximizing behavior of the informed agent and the trading mechanisms offered by his competitors. There exists a unique equilibrium in convex schedules. It is symmetric and differentiable and exhibits typical features of market-power: Equilibrium trading volume is lower than ex ante efficiency would require. Liquidity suppliers charge positive mark-ups and make positive expected profits, but these profits decrease with the number of competitors. In the limit, as this number goes to infinity, ask (resp. bid) prices converge towards the upper (resp. lower) tail expectations obtained in Glosten (1994) and expected profits are zero.

Separation of Regulators Against Collusive Behavior

We show that the separation of powers in regulation may act as a commitment against the threat of regulatory capture. Splitting regulatory tasks and monitoring technologies among several nonbenevolent regulators may reduce their discretion in engaging in socially wasteful activities. When regulators make collusive offers that are accepted by the agent whatever his characteristics, competition between regulators relaxes collusion-proofness constraints and improves social welfare. This result is robust to different specifications of the agents preferences and to the timing of the game as long as one insists on safe side-contracting offers. We also discuss how separation affects both allocative efficiency and the distribution of rents in the economy.

Mechanism Design with Collusion and Correlation

In a public good environment with positively correlated types, we characterize optimal mechanisms when agents have private information and can enter collusive agreements. First, we prove a weak-collusion-proof principle according to which there is no restriction for the principal in offering weak-collusion-proof mechanisms. Second, with this principle, we characterize the set of allocations that satisfy individual and coalitional incentive constraints. The optimal weakly collusion-proof mechanism calls for distortions away from first-best efficiency obtained without collusion. Allowing collusion restores continuity between the correlated and the uncorrelated environments. When the correlation becomes almost perfect, first-best efficiency is approached. Finally, the optimal collusion-proof mechanism is strongly ratifiable.

Collusion and Delegation

We discuss the internal organization of the firm, arguing that the comparison between a centralized and a decentralized hierarchical organization should be cast in terms of the agency costs associated with the different side-contracting games that agents play in these organizations. In our model, with no limits on communication between the agents and the principal (complete contracting), collusion is not an issue in a centralized organization. Centralization always dominates (at least weakly) delegation. With limits on communication (incomplete contracting), collusion may have some bite under centralization. Limits on communication introduce an anonymity condition on the contract, creating a conflict between participation and coalition incentive constraints under centralization. By shifting the bargaining power in the side-contracting stage, delegation is nonanonymous and asymmetric by design. This conflict is then avoided or diminished depending on the exact timing of the delegation game.

Exclusive Dealing, Common Agency, and Multiprincipals Incentive Theory

What are the costs and benefits of exclusive dealing and why do manufacturers choose to organize their retailing markets in this way instead of taking a common retailer? This article traces back the benefits of this organizational form of distribution to the provision of incentives in a setting of competing manufacturer-retailer hierarchies under adverse selection. It first develops a theoretical model that studies competition between hierarchies under the assumption of secret wholesale contracts. Second, it analyzes a game of choice of retailing channels between rival manufacturers. Depending on the extent of the adverse selection problem and on the complementarity or substitutability of their brands, manufacturers prefer to use either a common or an exclusive retailer.

Collusion, Delegation and Supervision with Soft Information

This paper shows that supervision with soft information is valuable whenever supervisors and supervisees collude under asymmetric information and proceeds then to derive an Equivalence Principle between organizational forms of supervisory and productive activities. We consider an organization with an agent privately informed on his productivity and a risk averse supervisor getting signals on the agents type. In a centralized organization, the principal can communicate and contract with both the supervisor and the agent. However, these two agents can collude against the principal. In a decentralized organization, the principal only communicates and contracts with the supervisor who in turn sub-contracts with the agent. We show that the two organizations achieve the same outcome. We discuss this equivalence and provide various comparative statics results to assess the efficiency of supervisory structures. Copyright 2003, Wiley-Blackwell.

The Life Cycle of Regulatory Agencies: Dynamic Capture and Transaction Costs

The dynamics of regulation is analysed in a model where regulatory capture comes from the repeated interaction between an interest group and a regulatory agency. Regulatory institutions offer a framework for this dynamic process. They put constraints on the interest groups influence. The dynamics of regulation and its long-run outcome depend on the political principals, the regulators and the regulated firms time preferences and their information. Some foundations for the transaction costs of side-contracting used in the standard literature on collusion are provided. Those transaction costs are linked to the precise nature of regulatory institutions.

Contractual Externalities and Common Agency Equilibria

This paper characterizes the equilibrium sets of common agency games with direct externalities between principals when they compete with nonlinear prices. Direct externalities arise when the contracting variable of one principal directly affects the other principals payoff. First, we characterize the set of pure-strategy, symmetric equilibria under complete information of an intrinsic common agency game. This set of equilibria is large because of the presence of price-output offers by the principals that are unchosen by the agent in equilibrium. Equilibria exist in which principals offer out-of-equilibrium price-output choices to the agent and induce aggressive, low-price behavior corresponding to marginal-cost pricing in the extreme case. We then show that this equilibrium set of outputs is robust to the possibility that agent refuses any of the offered contracts; the case of delegated agency. Second, we introduce asymmetric information in order to rationalize existing nonlinear pricing contracts. The introduction of asymmetric information has the effect of restricting the set of equilibrium outputs of the intrinsic common agency game.

The multiprincipal nature of government

Abstract One of the theoretical tools required to open the black box of the government organization is the theory of multiprincipals which describes how different incentive mechanisms compete with each others. In viewing the set of relationships between several government bodies and the entities they regulate as a set of competing contracts in which the control of the regulatory process is shared amongst these different regulators, we can address the question of the costs and the possible benefits of such structural separation. First, this paper surveys the previous literature on the topic. Then it traces out the possible benefits of such structures to the non-benevolence of regulators. We discuss also how regulatory rights of control and communication channels must be designed all together to deal with this problem.