Title: The Regulatory Policy as the Outcome of a Bargaining Process
Abstract: The aim of our research is to propose a pattern of government intervention which
differs from the standard approach and to assess its welfare implications. We argue that
in many circumstances regulation turns out to be a process of give-and-take rather than
take-it-or-leave-it. More precisely, our idea is that the regulatory policy can be more generally
modelled as the outcome of a bargaining process, which normally entails the active
participation of each agent involved in the regulatory interaction.
In Chapter 1, following Spulber’s intuition,
regulation is modelled as a negotiation process between the consumers’ and firm’s interest
groups, with the agency in the role of mediator. Our analysis shows that the regulated
firm exploits its bargaining power to obtain a subsidy which is higher than under a take-it-
or-leave-it offer of a total surplus maximizing mechanism. The oversubsidization of
the firm penalizes consumers and entails a total surplus loss. We find also that, under
asymmetric cost information, the range of the firm’s types participating in equilibrium in
the regulatory interaction may be wider under the negotiated policy than under the take-it-or-
leave-it policy.
We would like to stress that Chapter 1 is introductory and constitutes a preliminary
step for our research. On top of the specific analytical results, its contribution is twofold.
First, it describes the basic features of a negotiated regulatory policy and its welfare implications.
Second, it shows that the bargaining approach to regulation actually represents an
extention rather than a negation of the standard approach. In particular, the bargaining over
a regulatory policy may be interpreted as a general set-up which includes the take-it-or-leave-
it offer as a limit case, that occurs when the firm is deprived of any bargaining power
during negotiations.
The discussion in Chapter 2 develops the previous framework and considers an agency
which is delegated by Congress to represent consumers’ interests in the bargaining process
with the firm over a regulatory policy.
The existence of a negotiation activity between the agency and the firm has been
by and large ignored by the economic literature, with the main exception represented by Scarpa’s contributions. However, Armstrong and Sappington, in their review
on the recent developments in the theory of regulation, have recognized that the standard
formulation, which allocates all the bargaining power to the regulator, has been adopted for
technical convenience rather than for realism.
While it has been previously depicted as an impartial arbitrator, the agency is assumed
in Chapter 2 to represent a bargaining party, whose nature may be either benevolent
or self-interested. In this setting, we study the potential for collusion between the regulatory
agency and the regulated firm, a phenomenon which often occurs in a regulatory
relationship. The side contracting between the two colluding partners is modelled as a
(possibly illegal) negotiation process parallel to the bargaining over the regulatory policy.
Our analysis shows that consumers are penalized by corruption, since they entirely subsidize
the total stake in collusion. Furthermore, our model suggests that a stronger agency in
the bargaining process makes it more desirable for Congress (i.e. for consumers) to allow
collusion in equilibrium.
In the first two chapters, we have considered the existence of just one monopolistic
market. Chapter 3, which has benefited from the fundamental contribution of Carlo Scarpa,
extends the previous setting and examines the regulation of two interdependent markets,
whose goods are substitutes. This is the case, for instance, in the industries of natural
gas and electricity or railroads and motorways. We focus on the design of the regulatory
structure. In particular, we intend to determine whether it is better for consumers’ welfare
to have a unique authority for both markets or to split the regulatory jurisdiction between
two different agencies. When the regulatory policy is the outcome of a take-it-or-leave-it offer, our analysis
shows that two agencies - each maximizing total surplus in its own market - set prices
which are lower than those arising under regulatory centralization.
On the contrary, when the regulatory policy is the outcome of a bargaining process,
we find that a unique regulator, which sequentially bargains with both firms, gives consumers
a higher welfare level, as long as the shadow cost of public funds, through which
production is subsidized, is below a certain threshold. Hence, under negotiations our model
suggests that centralization should be the best regulatory pattern for consumers in developed
countries, where tax collection is not too distortionary. If the shadow cost is above
that threshold, as it often happens in developing countries, decentralizing bargaining turns
out to be consumers’ welfare improving.
Publication Year: 2009
Publication Date: 2009-02-18
Language: en
Type: dissertation
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