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Dynamic regulation of quality

  • Stéphane Auray
  • Thomas Mariotti
  • Fabien Moizeau

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://hdl.handle.net/10.1111/j.1756-2171.2011.00132.x
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Article provided by RAND Corporation in its journal RAND Journal of Economics.

Volume (Year): 42 (2011)
Issue (Month): 2 (06)
Pages: 246-265

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Handle: RePEc:bla:randje:v:42:y:2011:i:2:p:246-265
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