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Coordination and the provision of incentives to a common regulated firm

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  • Burnett, Johann Caro
  • Carrasco, Vinicius
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    Abstract

    This paper considers the problem faced by two regulators in providing incentives to a common (privately informed) regulated firm under various degrees of coordination. In the model, the firm exerts effort toward cost reduction and self-dealing, and incentives can be input-based (monitoring) and output-based (demanded cost targets). Full coordination between the regulators leads to the second best allocation. A setting in which the regulators do not fully coordinate leads to (i) higher overall monitoring (more aggressive input-based incentives) and (ii) higher demanded cost targets (i.e., more lenience in terms of output-based incentives). As a consequence of (i), in all possible equilibria, the effort toward cost reduction will be smaller when the agent reports to two regulators who do not coordinate. (i) and (ii) imply that the impact on the effort toward self-dealing activities is ambiguous. In our leading example, self-dealing will be larger if the regulators coordinate on monitoring levels but smaller if they choose monitoring levels independently.

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    Bibliographic Info

    Article provided by Elsevier in its journal International Journal of Industrial Organization.

    Volume (Year): 29 (2011)
    Issue (Month): 5 (September)
    Pages: 606-627

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    Handle: RePEc:eee:indorg:v:29:y:2011:i:5:p:606-627

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    Web page: http://www.elsevier.com/locate/inca/505551

    Related research

    Keywords: Regulation Common agency Coordination Input and output based incentives;

    References

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    1. Fahad Khalil & Bruno Parigi & David Martimort, 2007. "Monitoring a Common Agent: implications for financial contracting," Working Papers UWEC-2003-04-P, University of Washington, Department of Economics.
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    16. Dell'Ariccia, Giovanni & Marquez, Robert, 2006. "Competition among regulators and credit market integration," Journal of Financial Economics, Elsevier, vol. 79(2), pages 401-430, February.
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    18. Giacomo Calzolari, 2004. "Incentive Regulation of Multinational Enterprises," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 45(1), pages 257-282, 02.
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