Dynamic Regulation of Quality
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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|Date of creation:||Jul 2007|
|Date of revision:|
|Publication status:||Published in The RAND Journal of Economics, vol. 42, n°2, Summer 2011, p. 246-265.|
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