Dynamic Regulation of Public Good Quality
We investigate the design of incentives for public good 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 over-provision of quality, reflecting a dynamic rent extraction motive. When the regulator hires a single agent to manage public good quality, over-provision of quality can also be used by the regulator to strengthen dynamic incentives. This typically occurs when quality depreciates slowly and the discount factor is large. Further, we show that, for small levels of asymmetric information, there exists a threshold value of the high-quality-shock probability above (below) which social welfare is higher (smaller) when hiring a single agent rather than contracting with a sequence of agents. When no such commitment is feasible, the fact that quality physically links periods together leads to a ratchet effect even though private information is recurring, and shorter franchises are beneficial from a social point of view.
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