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    • The second strand is the literature on capture Laffont

    2018-10-30

    The second strand is the literature on capture. Laffont and Tirole (1991) developed the three-layer model to study collusion between a privately-informed agent and intermediates employed by the principal to bridge the informational gap. They showed that the principal may benefit from this arrangement even if the intermediate is non-benevolent, meaning that he would like to collude with the agent instead of passing information on to the regulator, as long as the proper non-collusion constraints are taken into account. This is the pilocarpine hydrochloride model used by Laffont and Martimort (1999), mentioned above, to justify that splitting this bridging task among different intermediaries improves welfare if it is possible to keep the structure of centralized contracting unaffected.Martimort (1999) provided a normative reason for the existence of multiple principals and is thus closest to the present paper: if regulators play a Stackelberg game and have limited commitment, then splitting regulatory powers makes renegotiation harder and increases welfare. The paper proceeds as follows. Section 2 presents the base model and reviews traditional results. Section 3 adds the structure that generates a trade-off between separation and integration of regulators. Section 4 presents the main result, whose proof is left to the appendix, and Section 5 briefly concludes.
    Model A social planner wants to implement a project q with social benefit V(q, α)≡V1(q, α)+V2(q, α), in which V is strictly increasing and concave and continuously differentiable such that V≫−∞. The parameter α affects the marginal benefit of q on V such that for some . There is only one agent able to produce q with the cost function c(q, θ) such that c, c, c, c>0. As usual, θ is the agent\'s private information and has a continuous density f>0, distribution F and support such that . Assume also (d/dθ)((F(θ)/f(θ)))>0. The agent\'s reservation utility is zero. For each monetary unit spent on the project, society pays 1+λ (tax distortion). All these assumptions are common knowledge. The planner may choose between two regulatory structures. Under integration, only one principal regulates the agent. Under separation, this task is split between two principals.
    Informational rent and corruption Non-benevolent regulators may be modelled in different ways. I follow Martimort (1996) and use a reduced-form model to describe how separating non-benevolent regulators may increase welfare. I assume that the informational rent decreases under separation of regulators. This may be justified as follows. Contract theory models usually have two layers, or two types of participant: a principal and an agent. A way to model corruption is to add a third layer: a middleman between them. The role of this middleman is to convey information from the agent to the principal. Specifically, this new participant has access to a technology that allows him to find out the agent\'s type with a given probability, which is strictly positive but lower than one. If the principal could run this technology, he would be able to achieve the first-best whenever he learnt the agent\'s type, and implement the second-best allocation whenever he failed to find it out. Ex-ante, the informational rent would decrease. However, such a technology is not operated by the principal directly. This may be due to the regulator\'s lack of expertise, or because his constitutional task is only to write contracts. In any case, it is necessary to use a middleman to apply it. If the middleman\'s objectives and the principal\'s were perfectly aligned, the previous result would go unchanged: the expected informational rent would decrease due to this technology. If the principal is to benefit from the monitoring technology, he must induce the middleman to report truthfully in at least some states of the nature. Under some mild assumptions, it is possible to show that once additional truth-telling restrictions (for the middleman) are added, the principal obtains, ex ante, a higher payoff. Furthermore, Laffont and Martimort (1999) showed that separating the monitoring technology between two middlemen decreases the expected informational rent. The reasoning is as follows. Each separate middleman evaluates individually a different aspect of the agent\'s technology. In a model of centralized contracting, the division of middlemen makes the “no-collusion” restrictions less severe than under integration. This result is similar to a prisoner\'s dilemma: the middlemen are not able to coordinate in order to achieve the best result from the point of view of the coalition made up by them. There are states of nature in which they cannot reap all of the agent\'s informational rent.