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Dynamic regulation of quality

  • Stéphane Auray
  • Thomas Mariotti
  • Fabien Moizeau

We develop a dynamic regulation model of quality provision where maintenance efforts and quality shocks have a durable impact. When the regulator contracts with a sequence of agents, asymmetric information can lead to overprovision of quality, reflecting a dynamic rent extraction effect. When the regulator contracts with a single agent, the efficiency of their relationship depends on the regulator's ability to transfer rents across periods. Hiring a single agent with unlimited liability is socially preferable to hiring a sequence of agents, even when no commitment is feasible. By contrast, shorter franchises are socially preferable if the agent has limited liability.

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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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