Analysis of vertical separation of regulators under adverse selection |
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Authors: | T Ida M Anbashi |
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Institution: | (1) Graduate School of Economics, Kyoto University, Yoshida, Sakyo, Kyoto 606-8501, Japan;(2) Economic and Industrial Policy Bureau, Ministry of Economy, Trade and Industry, Tokyo, Japan |
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Abstract: | We analyze the vertical separation of a regulator when a government delegates the task to monitor a regulated firm to an intermediate
institution called a “middleman”. We deal with the double adverse selection problem between the government and the middleman,
and between the middleman and the firm. We reach three main conclusions. First, we clarify the condition under which vertical
separation is socially superior to vertically integrated regulation. Second, we show that when the middleman and the firm
are able to collude by using a side contract, collusion can lead to information-sharing effects that enhance social welfare.
Third, it is socially desirable for the government to offer a collusion-proof contract to the middleman if the collusion inefficiency
is much larger than the expected socially desirable information-sharing effects.
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Keywords: | vertical separation regulatory reform intermediate institution adverse selection collusion |
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