Public intervention in a ‘take-it-or-leave-it’ transaction situation under varying interests of the intervening body

Abstract

Though there are economically based arguments for public intervention in negotiations between private agents, such intervention will often take place as a consequence of political interests. In this paper we discuss how varying political interests of an intervening body affect its intervention mechanism. We derive a unique Bayesian–Nash equilibrium for a two-step, three-player game in which the optimal intervention mechanism (subsidies) and the optimal size of the traded good are decided.

The paper has been motivated by the negotiations between a Russian processing plant, causing transboundary, polluting emissions, and Nordic companies offering technology which will reduce the emissions significantly. Nordic governments have intervened in the negotiations and offered subsidies, which is subtracted from the seller's price if trade takes place. Combining the theoretical results and empirical facts we conclude that the Norwegian government seems to have had stronger political interests in this case than did the Finnish government.