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.

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Academic Units
Center on Japanese Economy and Business
Center on Japanese Economy and Business, Graduate School of Business, Columbia University
Center on Japanese Economy and Business Working Papers, 134
Published Here
February 9, 2011