Dynamic Regulation of Quality

Stéphane Auray, Thomas Mariotti and Fabien Moizeau
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Thomas Mariotti: Toulouse School of Economics (GREMAQ/CNRS and IDEI)
Fabien Moizeau: Toulouse School of Economics (GREMAQ)

Cahiers de recherche from Departement d'Economique de la Faculte d'administration à l'Universite de Sherbrooke

Abstract: We investigate the design of incentives for 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 overprovision of quality, reflecting a dynamic rent extraction motive. When the regulator hires a single agent to manage quality, over-provision of quality can also be used by the regulator to strengthen dynamic incentives. We further show that for small levels of asymmetric information, the regulator may prefer contracting with a sequence of agents rather than hiring a single agent if high quality shocks are relatively unfrequent, 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 under recurring private information, and shorter franchises are beneficial from a social viewpoint.

Keywords: Quality; Regulation; Asymmetric Information (search for similar items in EconPapers)
JEL-codes: D82 L15 L51 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cta and nep-reg
Date: 2008
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http://pages.usherbrooke.ca/gredi/wpapers/GREDI-0811.pdf First version, 2008 (application/pdf)

Related works:
Working Paper: Dynamic Regulation of Quality (2006)
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Persistent link: http://EconPapers.repec.org/RePEc:shr:wpaper:08-11

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