Corruption and optimal regulation under common agency

Abstract

I show that it is optimal to separate non-benevolent regulators when regulated projects are large. Separation prevents regulators from coordinating to appropriate all of the agent's informational rent when they know the type of the latter; therefore, there is a trade-off between saving on informational rent and efficiency, since the game between the regulators induced by separation causes further distortions when compared to the allocation under one regulator. When the informational rent at stake is large due to the size of the project, separation is the optimal institutional answer.

Keywords

• Regulation
• Contract theory
• Corruption