Endogenous Monitoring in a Partnership Game

Anna Sanktjohanser's webpage

Abstract: I consider a repeated game in which, due to imperfect monitoring, no collusion can be sustained. I add a self-interested monitor who commits to generating an imperfect private signal of firms' actions and sends a public message. The monitor makes an offer specifying the precision of the signal generated and the amount to be paid in return. I show that with low monitoring cost, collusive equilibria exist. In the monitor's favorite collusive equilibrium, firms' payoffs are decreasing in the discount factor. My model helps explain the cartel agreements between the mafia and firms in legal industries in Italy and America.
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