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Multidimensional screening with complementary activities: regulating a monopolist with unknown cost and unknown preference for empire-building

Author

Listed:
  • Ana P. Borges

    (NIDISAG - Núcleo de Investigação do Instituto Superior de Administração e Gestão)

  • Didier Laussel

    (Aix-Marseille Université (AMSE))

  • João Correia-da-Silva

    (CEF.UP e Faculdade de Economia, Universidade do Porto)

Abstract

We study optimal regulation of a monopolist when intrinsic efficiency (intrinsic cost) and empire-building tendency (marginal utility of output) are private information but actual cost (difference between intrinsic cost and effort level) is observable. This is a problem of multidimensional screening with complementary activities. Results are mainly driven by two elements: the correlations between types; and the relative magnitude of the uncertainty along the two dimensions of private information. If the marginal utility of output varies much more (resp. less) across managers than the intrinsic marginal cost, then we have empire-building (resp. efficiency) dominance. In that case, an inefficient empire-builder produces more (resp. less) and at lower (resp. higher) marginal cost than an efficient money-seeker. It is only when variabilities are similar that we obtain the natural ranking of activities (empire-builders produce more while efficient managers produce at a lower cost).

Suggested Citation

  • Ana P. Borges & Didier Laussel & João Correia-da-Silva, 2013. "Multidimensional screening with complementary activities: regulating a monopolist with unknown cost and unknown preference for empire-building," FEP Working Papers 486, Universidade do Porto, Faculdade de Economia do Porto.
    • Handle: RePEc:por:fepwps:486
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    References listed on IDEAS

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    Cited by:

    1. João Correia-da-Silva & Joana Pinho & Hélder Vasconcelos, 2013. "Cartel stability and profits under different reactions to entry in markets with growing demand," FEP Working Papers 487, Universidade do Porto, Faculdade de Economia do Porto.

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    More about this item

    Keywords

    Multidimensional screening; regulation; procurement; empire-building; adverse selection.;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • H42 - Public Economics - - Publicly Provided Goods - - - Publicly Provided Private Goods
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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