Dynamic Regulation of Public Good Quality

Stéphane Auray, Thomas Mariotti and Fabien Moizeau

Cahiers de recherche from CIRPEE

Abstract: 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 under optimal regulation, reflecting a dynamic rent extraction motive. When the regulator hires a single agent to manage public good quality, over-provision of quality can also occur as a result of quality pooling, which typically occurs if quality depreciates slowly and the discount factor is large. We further show that for small levels of asymmetric information, the regulator prefers to hire a single agent rather than to contract with a sequence of agents, 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 when private information is recurring, and shorter franchises are beneficial from a social point of view.

Keywords: Quality; Regulation; Asymmetric Information (search for similar items in EconPapers)
JEL-codes: D82 L15 L51 (search for similar items in EconPapers)
Date: 2006
New Economics Papers: this item is included in nep-mic and nep-reg
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Related works:
Working Paper: Dynamic Regulation of Public Good Quality (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:lvl:lacicr:0610

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