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Regulation of Cost and Quality under Yardstick Competition

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  • Tangerås, Thomas P.

    ()
    (The Research Institute of Industrial Economics)

Abstract

This paper analyses simultaneous regulation of cost and quality when firms have private, correlated information about productivity and the regulator receives a signal about quality. It is shown that managerial effort and expenditures on quality are positively correlated in the optimal contract. The higher is firm productivity the more should the firm spend on quality improvement and the more efficiently should it produce. Optimal yardstick competition reduces distortion of both effort and quality. Under product market competition expenditures on quality should be increasing in the firm's own productivity and decreasing in the competitor's productivity.

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File URL: http://www.ifn.se/Wfiles/wp/WP573.pdf
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Bibliographic Info

Paper provided by Research Institute of Industrial Economics in its series Working Paper Series with number 573.

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Length: 41 pages
Date of creation: 23 Jan 2002
Date of revision:
Handle: RePEc:hhs:iuiwop:0573

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Keywords: Yardstick Competition; Quality; Regulation ;

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References

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  1. Joel Sobel, 1999. "A Reexamination of Yardstick Competition," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 8(1), pages 33-60, 03.
  2. Emmanuelle AURIOL, 1993. "Monopole ou duopole: l'effet de comparaison," Annales d'Economie et de Statistique, ENSAE, issue 31, pages 1-31.
  3. Laffont, Jean-Jacques & Martimort, David, 1998. "Mechanism Design with Collusion and Correlation," IDEI Working Papers 81, Institut d'Économie Industrielle (IDEI), Toulouse.
  4. Bengt Holmstrom, 1982. "Moral Hazard in Teams," Bell Journal of Economics, The RAND Corporation, vol. 13(2), pages 324-340, Autumn.
  5. Emmanuelle Auriol, 2000. "Concurrence par comparaison. Un point de vue normatif," Revue économique, Presses de Sciences-Po, vol. 0(3), pages 621-634.
  6. Auriol, Emmanuelle & Laffont, Jean-Jacques, 1992. "Regulation by Duopoly," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 1(3), pages 507-33, Fall.
  7. Andrei Shleifer, 1985. "A Theory of Yardstick Competition," RAND Journal of Economics, The RAND Corporation, vol. 16(3), pages 319-327, Autumn.
  8. Holmstrom, Bengt & Milgrom, Paul, 1991. "Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design," Journal of Law, Economics and Organization, Oxford University Press, vol. 7(0), pages 24-52, Special I.
  9. Auriol, Emmanuelle, 1998. "Deregulation and quality," International Journal of Industrial Organization, Elsevier, vol. 16(2), pages 169-194, March.
  10. Demski, Joel S. & Sappington, David, 1984. "Optimal incentive contracts with multiple agents," Journal of Economic Theory, Elsevier, vol. 33(1), pages 152-171, June.
  11. Broyles, Robert W. & Rosko, Michael D., 1985. "A qualitative assessment of the medicare prospective payment system," Social Science & Medicine, Elsevier, vol. 20(11), pages 1185-1190, January.
  12. Mookherjee, Dilip, 1984. "Optimal Incentive Schemes with Many Agents," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 433-46, July.
  13. Cremer, Jacques & McLean, Richard P, 1988. "Full Extraction of the Surplus in Bayesian and Dominant Strategy Auctions," Econometrica, Econometric Society, vol. 56(6), pages 1247-57, November.
  14. Dag Morten Dalen, 1998. "Yardstick Competition and Investment Incentives," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 7(1), pages 105-126, 03.
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Cited by:
  1. Ajodhia, Virendra & Hakvoort, Rudi, 2005. "Economic regulation of quality in electricity distribution networks," Utilities Policy, Elsevier, vol. 13(3), pages 211-221, September.
  2. Facanha, Luis Otavio & Resende, Marcelo, 2004. "Price cap regulation, incentives and quality:: The case of Brazilian telecommunications," International Journal of Production Economics, Elsevier, vol. 92(2), pages 133-144, November.

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