1997 Reports

Implicit contracts between regulator and firms: The case of Japanese casualty insurance

Wallner, Klaus

This paper presents a dynamic model of regulatory protection. The regulator grants the industry rents in exchange for cooperation in an asymmetric information environment as part of an implicit contract enforced by a trigger strategy. At a corner-solution this contract may be stable under gradual changes of society's preference parameter, while beyond a threshold level further changes may result in drastic deregulation. Both predictions are found to hold in the case of Ministry of Finance regulation in the Japanese casualty insurance industry.