Regulatory mechanism design with extortionary collusion

We study regulatory mechanism design with collusion between a privately informed agent and a less well-informed supervisor, incorporating ‘extortion’ which permits redistribution of rents within the coalition. We show the Collusion Proof Principle holds, and that the allocation of bargaining power between the supervisor and agent matters. Specifically, the Principal does not benefit from hiring the supervisor if the latter has less bargaining power vis-a-vis the agent. We provide an example where hiring the supervisor is valuable if she has greater bargaining power. These results indicate the importance of anti-collusion strategies that augment bargaining power of supervisors vis-a-vis agents.