Capture, Politics and Antitrust Effectiveness

Abstract

We study a three-tier hierarchy Political Principal - Competition Authority - Firms in which the Principal chooses the Authority's (i) budget, (ii) percentage of the fine (bonus), and (iii) preferences in presence of moral hazard. Collusion between the Authority and firms may arise in order to avoid fines. For high efficiency levels of the bribing technology, the collusion-proof contract induces the Authority to exert more effort: the Principal trades-off the benefits from allowing the Authority to exert the desidered level of effort by devoting it an increasing budget, with the cost of leaving it an increasing expected rent, thus making the budget non- monotone in the bribing technology efficiency's level. We find that, ceteris paribus, both the optimal budget and the bonus are non-increasing in (a) the Principal's degree of internalization of firms' profits, non-monotone in (b) firms' anti-competitive profits, and ambiguous in (c) the fine. Firms can also bribe the Principal for a reduced budget. In this setting, both the budget and the bonus are non-increasing in (a), (b), and in the bribing technology efficiency's level, and ambiguous in (c). Instances in which the Authority is allocated a zero budget and/or a zero bonus are characterized. Finally we show that the Principal prefers a consumers' surplus maximizer Competition Authority.