Emotions matter for policy-making: An example on tacit collusion and guilt

Abstract

In the paper we show how emotions may influence the effectiveness of policies, highlighting the need for an analysis of belief-dependent motivations in policy-making. We do so by using an example of tacit collusion in an infinitely repeated duopoly. We find that which type of duopoly favors collusion the most depends on the level of guilt aversion. Specifically, it is easier to sustain collusion in a Bertrand duopoly for low levels of guilt and in a Cournot duopoly for intermediate levels of guilt. When the guilt parameter is high, collusion is sustained for any discount factor in both market structures. Moreover, we show how competition policies, such as the introduction of random audits and fines, may be less effective in the presence of guilt.