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Dynamic Regulation of Public Good Quality

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Author Info
Stéphane Auray
Thomas Mariotti
Fabien Moizeau

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Abstract

We investigate the design of incentives for public good 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 over-provision of quality under optimal regulation, reflecting a dynamic rent extraction motive. When the regulator hires a single agent to manage public good quality, over-provision of quality can also occur as a result of quality pooling, which typically occurs if quality depreciates slowly and the discount factor is large. We further show that for small levels of asymmetric information, the regulator prefers to hire a single agent rather than to contract with a sequence of agents, 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 when private information is recurring, and shorter franchises are beneficial from a social point of view.

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Publisher Info
Paper provided by CIRPEE in its series Cahiers de recherche with number 0610.

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Date of creation: 2006
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Handle: RePEc:lvl:lacicr:0610

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Related research
Keywords: Quality; Regulation; Asymmetric Information;

Find related papers by JEL classification:
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
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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References listed on IDEAS
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  1. Ingo Vogelsang & Jorg Finsinger, 1979. "A Regulatory Adjustment Process for Optimal Pricing by Multiproduct Monopoly Firms," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 157-171, Spring. [Downloadable!] (restricted)
  2. Lewis, Tracy R & Sappington, David E M, 1992. "Incentives for Conservation and Quality-Improvement by Public Utilities," American Economic Review, American Economic Association, vol. 82(5), pages 1321-40, December. [Downloadable!] (restricted)
  3. Dennis Gaertner, 2004. "Endogenizing Private Information: Incentive Contracts under Learning By Doing," Working Papers 0413, University of Zurich, Socioeconomic Institute. [Downloadable!]
  4. Gérard Gaudet & Pierre Lasserre & Ngo Van Long, 1995. "Dynamic Incentive Contracts with Uncorrelated Private Information and History Dependent Outcomes," CIRANO Working Papers 95s-37, CIRANO. [Downloadable!]
    Other versions:
  5. Baron, David P. & Besanko, David, 1984. "Regulation and information in a continuing relationship," Information Economics and Policy, Elsevier, vol. 1(3), pages 267-302. [Downloadable!] (restricted)
  6. Laffont, J-J. & Tirole, J., 1989. "Provision Of Quality And Power Of Incentive Schemes In Regulated Industries," Working papers 528, Massachusetts Institute of Technology (MIT), Department of Economics.
  7. Rogerson, William P, 1985. "Repeated Moral Hazard," Econometrica, Econometric Society, vol. 53(1), pages 69-76, January. [Downloadable!] (restricted)
  8. Laffont, Jean-Jacques & Tirole, Jean, 1986. "Using Cost Observation to Regulate Firms," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 614-41, June. [Downloadable!] (restricted)
    Other versions:
  9. Laffont, Jean-Jacques & Tirole, Jean, 1988. "The Dynamics of Incentive Contracts," Econometrica, Econometric Society, vol. 56(5), pages 1153-75, September. [Downloadable!] (restricted)
    Other versions:
  10. Tracy R. Lewis & David E.M. Sappington, 1991. "Incentives for Monitoring Quality," RAND Journal of Economics, The RAND Corporation, vol. 22(3), pages 370-384, Autumn. [Downloadable!] (restricted)
  11. Freixas, Xavier & Guesnerie, Roger & Tirole, Jean, 1985. "Planning under Incomplete Information and the Ratchet Effect," Review of Economic Studies, Blackwell Publishing, vol. 52(2), pages 173-91, April. [Downloadable!] (restricted)
  12. d'Aspremont, Claude & Gerard-Varet, Louis-Andre, 1979. "Incentives and incomplete information," Journal of Public Economics, Elsevier, vol. 11(1), pages 25-45, February. [Downloadable!] (restricted)
  13. Tracy R. Lewis & Huseyin Yildirim, 2002. "Learning by Doing and Dynamic Regulation," RAND Journal of Economics, The RAND Corporation, vol. 33(1), pages 22-36, Spring.
  14. Laffont, Jean-Jacques & Tirole, Jean, 1990. "Adverse Selection and Renegotiation in Procurement," Review of Economic Studies, Blackwell Publishing, vol. 57(4), pages 597-625, October. [Downloadable!] (restricted)
    Other versions:
  15. De Fraja, Gianni & Iozzi, Alberto, 2004. "Bigger and Better: A Dynamic Regulatory Mechanism for Optimum Quality," CEPR Discussion Papers 4502, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  16. Tracy Lewis & David E.M. Sappington, 1997. "Penalizing Success in Dynamic Incentive Contracts: No. Good Deed Goes Unpunished?," RAND Journal of Economics, The RAND Corporation, vol. 28(2), pages 346-358, Summer. [Downloadable!] (restricted)
  17. Mark Armstrong & Simon Cowan & John Vickers, 1994. "Regulatory Reform: Economic Analysis and British Experience," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262510790, March.
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