Dynamic regulation of quality
AbstractWe investigate the design of incentives for quality provision in a dynamic regulation setting in which maintenance efforts and quality shocks have durable effects. When the regulator contracts with a sequence of agents, asymmetries of information can lead to overprovision of quality, reflecting a dynamic rent extraction motive. When the regulator hires a single agent to manage quality, over-provision of quality can also be used by the regulator to strengthen dynamic incentives. We further show that for small levels of asymmetric information, the regulator may prefer contracting with a sequence of agents rather than hiring a single agent if high quality shocks are relatively unfrequent, provided all parties can commit to a long-term contract. When no such commitment is feasible, the fact that quality physically links periods together leads to a ratchet effect even under recurring private information, and shorter franchises are beneficial from a social viewpoint.
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Bibliographic InfoArticle provided by RAND Corporation in its journal RAND Journal of Economics.
Volume (Year): 42 (2011)
Issue (Month): 2 (06)
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Other versions of this item:
- Auray, Stéphane & Mariotti, Thomas & Moizeau, Fabien, 2007. "Dynamic Regulation of Quality," IDEI Working Papers 397, Institut d'Économie Industrielle (IDEI), Toulouse.
- Stéphane Auray & Thomas Mariotti & Fabien Moizeau, 2008. "Dynamic Regulation of Quality," Cahiers de recherche 08-11, Departement d'Economique de la Faculte d'administration à l'Universite de Sherbrooke.
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
- L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
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