Dynamic Regulation of Public Good Quality
AbstractWe 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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Bibliographic InfoPaper provided by CIRPEE in its series Cahiers de recherche with number 0610.
Date of creation: 2006
Date of revision:
Quality; Regulation; Asymmetric Information;
Other versions of this item:
- 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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-05-13 (All new papers)
- NEP-MIC-2006-05-13 (Microeconomics)
- NEP-REG-2006-05-13 (Regulation)
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