"Revolving Doors" and Optimal Tolerance for Agency Collusion

Abstract

In this article, I study how the presence of a revolving door and potential collusion between a regulator and a regulated firm affect the regulator's performance incentives. Contrary to the conventional wisdom, these seemingly undesirable features of the regulatory system may serve the interests of the government because (i) the regulator's efforts to enhance her industry qualifications may have a complementary effect on her regulatory performance and (ii) the regulator may become more aggressive in regulation so as to signal her industry qualifications to the firm. Collusion between a regulator and a firm also can be beneficial because a regulator may increase her monitoring effort in order to increase the chance of achieving a profitable side contract with the firm, and side-contracting may not always succeed.