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

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Author Info

  • 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).

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Bibliographic Info

Paper provided by Universidade do Porto, Faculdade de Economia do Porto in its series FEP Working Papers with number 486.

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Length: 37 pages
Date of creation: Feb 2013
Date of revision:
Handle: RePEc:por:fepwps:486

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Keywords: Multidimensional screening; regulation; procurement; empire-building; adverse selection.;

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  1. Michael C. Jensen, 2010. "The Modern Industrial Revolution, Exit, and the Failure of Internal Control Systems," Journal of Applied Corporate Finance, Morgan Stanley, vol. 22(1), pages 43-58.
  2. Carlos Seixas & António Brandão & Manuel Luís Costa, 2013. "Policy Choices by an Incumbent - A Case with Down-Up Problem, Bias Beliefs and Retrospective Voting," FEP Working Papers 485, Universidade do Porto, Faculdade de Economia do Porto.
  3. Armstrong, Mark & Rochet, Jean-Charles, 1999. "Multi-dimensional screening:: A user's guide," European Economic Review, Elsevier, vol. 43(4-6), pages 959-979, April.
  4. Hélder Ferreira & Aurora A.C. Teixeira, 2013. "‘Welcome to the experience economy’: assessing the influence of customer experience literature through bibliometric analysis," FEP Working Papers 481, Universidade do Porto, Faculdade de Economia do Porto.
  5. Ana Carina Araújo & Aurora A.C. Teixeira, 2013. "Determinants of international technology transfer: an empirical analysis of the Enterprise Europe Network," FEP Working Papers 480, Universidade do Porto, Faculdade de Economia do Porto.
  6. Márcia Oliveira & Dalila B. M. M. Fontes & Teresa Pereira, 2013. "Multicriteria Decision Making: A Case Study in the Automobile Industry," FEP Working Papers 483, Universidade do Porto, Faculdade de Economia do Porto.
  7. Ana Pinto Borges & João Correia‐Da‐Silva, 2011. "Using Cost Observation To Regulate A Manager Who Has A Preference For Empire‐Building," Manchester School, University of Manchester, vol. 79(1), pages 29-44, January.
  8. Paula Gracinda Santos & Ana Paula Ribeiro & Vitor Manuel Carvalho, 2013. "Export-led growth in Europe: Where and what to export?," FEP Working Papers 479, Universidade do Porto, Faculdade de Economia do Porto.
  9. Elena Sochirca & Pedro Mazeda Gil & Oscar Afonso, 2013. "Technology Structure and Skill Structure: Costly Investment and Complementarity Effects Quantification," FEP Working Papers 478, Universidade do Porto, Faculdade de Economia do Porto.
  10. Ana Pinto Borges & João Correia-da-Silva, 2008. "Using Cost Observation to Regulate Bureaucratic Firms," FEP Working Papers 304, Universidade do Porto, Faculdade de Economia do Porto.
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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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