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  • My focus is not on the actual endogenous decrease

    2018-11-13

    My focus is not on the actual (endogenous) decrease in corruption generated by the separation of middlemen. This decrease may be computed, in expected terms, for different technologies and contractual arrangements – i.e., separation or rgd peptide of regulators. For the purpose of the present paper, it is sufficient to assume that separation decreases the expected informational rent by some degree; I assume that the expected rent given up to corruption, irrespective of how they are divided between the agent and the middlemen, is scaled down by an exogenous factor k<1 when the monitoring technologies are separated. This factor may be seen as an upper bound on the endogenous decrease generated under separation of middlemen for given monitoring technologies. The reduced-form model I use is then simply a two-layer hierarchy structure in which the informational rent decreases under multiple principals. Instead of fully modelling the middleman\'s objective function and the additional truth-telling incentive compatibility constraints in order to compute the actual decrease in the expected information rent, it is enough to assume k<1. This may be seen as a complementary approach to rgd peptide Laffont and Martimort (1999). They assume that splitting technologies generates no frictions to the exogenous contracting framework: the cost of adding a new middleman is zero in the sense that the centralized contracting structure is unaffected. Since the additional middleman has a strictly positive benefit to the (unique) principal, it follows that splitting monitoring technologies increases welfare as it decreases the rent that is given up to implement any allocation, without costs; the main contribution of Laffont and Martimort (1999) is to endogenize k. On the opposite direction, I make the assumption that splitting technologies has a strictly positive benefit to the principal, and proceed to endogenize the optimal contracting structure. The agent\'s payoff is the same as presented in the previous section, while the principal\'s payoff is changed by considering the ex-ante informational rent kΦ(q(θ), θ). It is worth noticing that if the middleman were not corrupt, or if the principal could operate the monitoring technology directly, then the expected informational rent would decrease by some factor k*0 is the expected loss to corruption. In the current setup, however, k* is immaterial as the principal can never achieve it; the relevant information is [1−k]Φ>0, which represents the actual gain from introducing the middlemen – i.e., the decreased corruption.
    Separation of regulators and the size of projects The basic intuition of this paper is that the choice between separation and integration should depend on the size of the regulated project. However, there is no satisfactory measure of size. Instead of building such a measure, I will refer to the parameter of marginal benefit α since it is directly related to the optimal size of the project under any contractual structure: notice that (2.11) and (3.2) imply that both q and q are increasing in α. All else being equal, a higher value of α is associated to larger projects.
    It is worth discussing the conditions behind this result. Separation is the optimal choice when the rent at stake is large; therefore, it depends on the efficiency of spiting regulators in fighting corruption, or on a low value of k. But this is exactly what makes the coordination problem between regulators mild, as one can see in Eq. (3.2). This double role of k drives the result. Formally, this result is due to the fact that welfare under separation is not evaluated at the argument that maximizes it for a given k – the common agency equilibrium is a third-best due to the distortion generated by the free-riding problem. Defining Δ=SW(q(α, k, θ), α, k)−SW(q(α, k), α) as the difference between welfare under separation and under integration of regulators, one may compute the following derivative: