Liam Lods

Abstract

This paper studies the optimal regulation of a firm subject to internal stakeholder influence. We embed a complete-information delegated common agency game, where stakeholders influence a manager via side-transfers, within a regulatory screening problem. Because the regulator designs the baseline schedule that anchors the influence game, she anticipates and free-rides on this inevitable internal lobbying to reduce transfers paid to the firm's manager. When the regulator has redistributive preferences favouring hostile stakeholders, her strategic depression of the manager's fallback option in the lobbying game generates countervailing incentives, resulting in optimal bunching for the most efficient types, which is distortive in expected terms. Finally, when multiple stakeholder groups compete, the regulator's ability to manipulate their marginal contributions breaks the standard neutrality result of menu auctions, demonstrating that the internal distribution of stakes alters optimal regulation.