Possibility Of Collusion Research Articles

Designing Collusion-Proof International Environmental Agreements: Developing Countries and Polluting Firms

We analyze the design of international environmental agreements (IEA) for developing countries (DCs) by a supranational governmental authority (SNGA). We focus on the interaction between an asymmetrically informed SNGA, national governments, and polluting firms in DCs. Two scenarios are compared. In the first, the DC government and the SNGA negotiate a ceiling on pollution abatement and then the SNGA offers an incentive-compatible and collusion-proof IEA to the two DC parties. In the second, the DC government manipulates its monitoring device and the SNGA takes this into account when designing the IEA. Our principal conclusions are as follows. First, the contractually specified levels of pollution abatement and the pattern of the weighted marginal costs of abatement differ depending on the form of the DC government's representation. Second, for the most part, the SNGA is able to extract the informational rents from the government and the firm. Third, as compared with contracting with monitoring device manipulation, the SNGA will prefer contracting with a ceiling constraint. Fourth, the pollution ceiling and the budget constraints limit the magnitude of the monetary transfers that the SNGA can offer and the extent of pollution abatement that the SNGA can require. Finally, by explicitly modeling the effects of sovereignty, that is, by disallowing the possibility of monitoring and enforcement and by allowing the possibility of collusion, we show that the SNGA's lack of monitoring and enforcement powers do not preclude it from designing effective collusion-proof IEAs.

Law Enforcement and Legal Presumptions

We compare two alternative legal presumptions, one more pro-defendant than the other, with the objective of reducing bureaucratic corruption to any target level at minimum social costs, broadly defined to include law enforcement costs, trial costs, and verdict error costs. In the absence of collusion possibilities between law enforcers and offenders, presumption of innocence involves lower social costs for low corruption targets while presumption of guilt has a cost advantage for high corruption targets. Allowing for collusion enlarges the corruption range over which the presumed innocence rule will dominate. However, there are two possible exceptions to this outcome, namely, if the government's law enforcement budget is limited and if the offenders can be penalized only up to a maximum permissible limit. In each of these cases, presumption of guilt may become the cost-effective rule. J. Comp. Econ., December 2001, 29(4), pp. 722–748. Bilkent University, Bilkent 06533, Ankara, Turkey; and Department of Economics and Finance, Birkbeck College, University of London, 7-15 Gresse Street, London W1T 1LL, United Kingdom. © 2001 Elsevier ScienceJournal of Economic Literature Classification Numbers: D73, D78, K41, K42.

Transport, the strategic issue at stake for the future of natural gas in Europe: avoidance of hidden collusion and implementation of efficient pricing

Two main conditions must simultaneously be met for the European gas market to become a competitive market: 1) the absence of collusion among the various actors; 2) the setting of a fair and efficient tariff system for the gas pipelines. In order to evaluate the possibility of collusion among European operators, we give in the first part of the paper a picture of the different actors involved in the upstream segment and the transport-distribution one. We show in the second part that the regulators have to make two kinds of choices concerning the transport system pricing with TPA: 1) a choice concerning the type of control (price cap or cost plus); 2) a choice concerning the allocation of fixed costs between the capacity-booking charges and the actual transportation cost charges.

Collusion, renegotiation and implementation

We study the implementation problem for exchange economies when agents can renegotiate the outcome assigned by the planner and can collude. We focus on the use of sequential mechanisms and present a simple sufficient condition for implementation with renegotiation in strong perfect equilibrium. We present an application to optimal risk sharing, showing that the possibility of collusion and renegotiation does not in general prevent the implementation of efficient allocations.

Monitoring, Liquidation, and Security Design

By identifying the possibility of imposing a credible threat of liquidation as the key role of informed (bank) finance in a moral hazard context, we characterize the circumstances under which a mixture of informed and uninformed (market) finance is optimal, and explain why bank debt is typically secured, senior, and tightly held. We also show that the effectiveness of mixed finance may be impaired by the possibility of collusion between the firms and their informed lenders, and that in the optimal renegotiation-proof contract informed debt capacity will be exhausted before appealing to supplementary uninformed finance. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

Collusion under financial constraints: Collusion or predation when the discount factor is near one?

This paper considers the possibility of collusion between financially constrained firms. It is found that they cannot collude when the discount factor is sufficiently close to one while collusion emerges at lower discount factors.

Commitment with Selfish Regulators

The recent literature on hierarchies departs from the traditional literature on regulation by opening the Black Box of the regulatory body and separating it into at least two layers of control: Congress1 and the regulatory agency. Tirole (1986) and Tirole arid Laffont (1988) show that if the regulator is self-interested, the possibility of collusion between the regulator and the firm always decreases welfare because there are additional incentive compatibility constraints to be satisfied. In this paper I propose that the possibility of collusion between the regulator and the regulated can be beneficial. I argue that delegation to a self-int;erested agent who does not hesitate to accept bribes from the firm is essential to a solution of the regulatory holdup problem. Furthermore, I demonstrate that this solution is robust to the possibility of re-negotiation between the principal and the agent. This paper sheds light on the following problems of the internal organization of regulatory agencies. First, as others have pointed out, the law enforcement branches of federal regulatory agencies usually have limited budgets and insufficient staff to maintain vigorous enforcement. For example, the Occupational Safety and Health Administration (OSHA) in the U.S. has so few staff that firms expect to be subject to one on-site inspection per century. Furthermore the enforcement officials are usually not political appointees over whom the U.S. Congress can exercise control. They tend to be career bureaucrats with life-long employment contracts and whose preferences are not necessarily aligned with those of Congress. The question is: Why doesn't Congress attempt to allocate more resources to and exercise more control over law enforcement? Second, the evidence is well-documented that possibilities exist for collusion between the regulator and the regulated. There are numerous examples of the so-called revolving doors, 2 whereby retired regulatory officials take lucrative jobs with firms formerly under their jurisdiction. For

Corruption and Supervision Costs in Hierarchies

We study the problem of organizing three agents in a hierarchical monitoring structure and designing a corresponding incentive system to minimize the cost of implementing a target level of corruption. We show that the possibility of collusion may prevent the implementation of anything less than full corruption. In relatively flat hierarchies, economies of scale in monitoring reduce implementation costs but may increase the risk of collusion. We contrast the performance of the hierarchy where one supervisor monitors two subordinates with the supervision chain, whose upper part is shown to display a higher risk of collusion than its lower part.

International Price Discrimination in the European Car Market

Why are car prices so different across European countries? I construct and estimate an oligopoly model to analyze whether international price discrimination can explain the puzzle. Three sources of international price discrimination are considered: price elasticities, import quota constraints, and collusion. The data reveal that international price discrimination accounts for an important part of the observed price differences. Low price elasticities (or domestic market power) are present in France, Germany, the United Kingdom, and especially Italy. Binding import quota constraints on Japanese cars exist in France and Italy. The possibility of collusion cannot be rejected in Germany and the United Kingdom.

RJR Nabisco: A Case Study of a Complex Leveraged Buyout

Several features of RJR Nabisco made it a particularly attractive LBO candidate. Its operations exhibited moderate and consistent growth, required little capital investment and carried low debt levels. Its problems-a declining return on assets and falling inventory turnover-appeared fixable. And it offered significant break-up value. Valuing RJR's equity at the time of the LBO requires detailed knowledge of the company's operations and extensive number crunching. The analysis is obviously quite dependent on the assumptions made about cash flow in the post-LBO period, as well as the long-term, steady-state growth rate. Nevertheless, the figures suggest that, even assuming a high, 5 per cent level of steady-state growth, RJR's cash flows would have to grow at a rate of at least 18 per cent per year to justify KKR's bid of $109 per share. RJR's board played a prominent role in the bidding process. By setting the bidding rules, the board successfully minimized the possibility of collusion and thus increased potential gains to stakeholders. The decision to accept KKR's offer over RJR management's higher bid appears to reflect the board's concern for employees and existing shareholders.

On the robustness of contestability theory

The robustness of contestability theory is discussed with special attention to the role of price response lags. The possibility of collusion in the post-entry game is examined by modeling an infinitely repeated game. Moreover, the ‘hit-and-run’ strategy is obtained as the unique subgame perfect equilibrium of a repeated game with infinite horizon, under certain conditions.

Collusion and the Choice of Auction

Auctions are used in many different markets, including the leasing of a substantial fraction of the natural resources in the United States. The procedures used in the auctions conducted by the federal government have been a continuing source of controversy. One of the concerns has been the possibility of collusion among bidders. This article shows that cartels are stable if the seller uses open ascending-bid (oral) auctions, but not if he uses sealed high-bid auctions. This may help to explain the frequent use of sealed high-bid auctions.

Raw material for a situational test of honesty.

The recent studies of Goldstein and Wright ( 1966) and Goldstein and Easterly ( 1967) exemplify a family of human discrimination learning procedures in which there are several types of trial, some permitting only a guess but others susceptible to total mastery. Assorted comments from Ss and students over several years have indicated that many people act on the assumption that total mastery of all trials ought to be possible. The likelihood of such an assumption may be heightened when the procedure is described as a test, because ordinary tests do make it possible for an informed S to achieve complete success. Moreover, other human discrimination learning tasks can be mastered completely (e.g., Goldstein & Weber, 1965) and may increase misconceptions about insoluble trials when present in the same context. As a result, the insoluble nature of certain trials at times amounts to highly privileged information in the psychologist's possession. This privileged information can perhaps provide the basis for future tests of honesty. We must distinguish A, the person administering discrimination learning tasks, from E, the person ultimately in charge. It is assumed that E sends A to test S, a simple matter because the tasks involved make only clerical demands upon A. But E neglects to inform A that some trials allow S nothing better than a guess. The consequence is that those trials test the honesty of A and S while other trials test the ability of S. It is hoped that someone wiU see fit to develop a situational test of honesty out of the raw material here described. The author has other leads to pursue and lacks the time to do this one justice. The main problem ahead is that of designing a situation that favors the manifest emergence of otherwise hidden dishonesty in A and/or S. Particularly promising is the possibility of collusion between A and S when both have something to gain, when A feels personal loyalty to S and wants him to look good, or when either A or S is E's confederate. The apparatus of the three cited studies is not recommended for present purposes. Instead, one should use a stack of cards that clearly yields no record of S's performance other than the written record provided by A.