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Dynamic Regulation of Quality

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Author Info
Stéphane Auray () (Université Lille 3 (GREMARS), Université de Sherbrooke (GREDI) and CIRPÉE)
Thomas Mariotti (Toulouse School of Economics (GREMAQ/CNRS and IDEI))
Fabien Moizeau (Toulouse School of Economics (GREMAQ))

Additional information is available for the following registered author(s):

Abstract

We investigate the design of incentives for 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 overprovision of quality, reflecting a dynamic rent extraction motive. When the regulator hires a single agent to manage quality, over-provision of quality can also be used by the regulator to strengthen dynamic incentives. We further show that for small levels of asymmetric information, the regulator may prefer contracting with a sequence of agents rather than hiring a single agent if high quality shocks are relatively unfrequent, 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 under recurring private information, and shorter franchises are beneficial from a social viewpoint.

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File URL: http://pages.usherbrooke.ca/gredi/wpapers/GREDI-0811.pdf
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File Function: First version, 2008
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Publisher Info
Paper provided by Departement d'Economique de la Faculte d'administration à l'Universite de Sherbrooke in its series Cahiers de recherche with number 08-11.

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Length: 38 pages
Date of creation: 2008
Date of revision:
Handle: RePEc:shr:wpaper:08-11

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Related research
Keywords: Quality; Regulation; Asymmetric Information;

Other versions of this item:

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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    Other versions:
  3. 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)
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    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. Rogerson, William P, 1985. "Repeated Moral Hazard," Econometrica, Econometric Society, vol. 53(1), pages 69-76, January. [Downloadable!] (restricted)
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  8. 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:
  9. 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)
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  14. 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:
  15. 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.
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