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Dynamic Regulation of Quality

  • Auray, Stéphane
  • Mariotti, Thomas
  • Moizeau, Fabien

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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Paper provided by Institut d'Économie Industrielle (IDEI), Toulouse in its series IDEI Working Papers with number 397.

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Date of creation: Jul 2007
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Publication status: Published in The RAND Journal of Economics, vol. 42, n°2, Summer 2011, p. 246-265.
Handle: RePEc:ide:wpaper:5510
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  1. Susan Athey & Ilya Segal, 2007. "An Efficient Dynamic Mechanism," Levine's Bibliography 122247000000001134, UCLA Department of Economics.
  2. Tracy Lewis & David E.M. Sappington, 1997. "Penalizing Success in Dynamic Incentive Contracts: No. Good Deed Goes Unpunished?," RAND Journal of Economics, The RAND Corporation, vol. 28(2), pages 346-358, Summer.
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  6. Tracy R. Lewis & David E.M. Sappington, 1991. "Incentives for Monitoring Quality," RAND Journal of Economics, The RAND Corporation, vol. 22(3), pages 370-384, Autumn.
  7. Alessandro Pavan & Ilya Segal & Juuso Toikka, 2009. "Dynamic Mechanism Design: Incentive Compatibility, Profit Maximization and Information Disclosure," Discussion Papers 1501, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  8. Xavier Freixas & Roger Guesnerie & Jean Tirole, 1985. "Planning under Incomplete Information and the Ratchet Effect," Review of Economic Studies, Oxford University Press, vol. 52(2), pages 173-191.
  9. 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.
  10. 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.
  11. Jean-Jacques LAFFONT & Jean TIROLE, 1990. "Adverse Selection and Renegotiation in Procurement," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 9005, Université de Lausanne, Faculté des HEC, DEEP.
  12. Marco Battaglini, 2003. "Long-Term Contracting with Markovian Consumers," Theory workshop papers 505798000000000048, UCLA Department of Economics.
  13. Dennis Gaertner, 2004. "Endogenizing Private Information: Incentive Contracts under Learning By Doing," SOI - Working Papers 0413, Socioeconomic Institute - University of Zurich.
  14. De Fraja, Gianni & Iozzi, Alberto, 2004. "Bigger and Better: A Dynamic Regulatory Mechanism for Optimum Quality," CEPR Discussion Papers 4502, C.E.P.R. Discussion Papers.
  15. Baron, David P. & Besanko, David, 1984. "Regulation and information in a continuing relationship," Information Economics and Policy, Elsevier, vol. 1(3), pages 267-302.
  16. Gaudet, Gerard & Lassere, Pierre & Long, Ngo Van, 1995. "Optimal Resource Royalties with Unknown and Temporally Independent Extraction Cost Structures," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(3), pages 715-49, August.
  17. Rogerson, William P, 1985. "Repeated Moral Hazard," Econometrica, Econometric Society, vol. 53(1), pages 69-76, January.
  18. Ingo Vogelsang & Jorg Finsinger, 1979. "A Regulatory Adjustment Process for Optimal Pricing by Multiproduct Monopoly Firms," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 157-171, Spring.
  19. Laffont, Jean-Jacques & Tirole, Jean, 1988. "The Dynamics of Incentive Contracts," Econometrica, Econometric Society, vol. 56(5), pages 1153-75, September.
  20. Tracy R. Lewis & Huseyin Yildirim, 2002. "Learning by Doing and Dynamic Regulation," RAND Journal of Economics, The RAND Corporation, vol. 33(1), pages 22-36, Spring.
  21. David Sappington, 2005. "Regulating Service Quality: A Survey," Journal of Regulatory Economics, Springer, vol. 27(2), pages 123-154, November.
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