Explaining escalating prices and fines: A unified approach

Stefan Buehler and Nicolas Eschenbaum

Journal of Economic Behavior & Organization, 2020, vol. 171, issue C, 153-164

Abstract: This paper provides an explanation for escalating prices and fines based on a unified analytical framework that nests monopoly pricing and optimal law enforcement. We show that escalation emerges as an optimal outcome if the principal (i) lacks commitment ability, and (ii) gives less than full weight to agent benefits. Escalation is driven by decreasing transfers for non-active agents rather than increasing transfers for active agents. Some forward-looking agents then strategically delay their activity, which drives a wedge between the optimal static transfer and the benefit of an indifferent agent. This wedge is the source of escalation.

Keywords: Escalation; Behavior-based pricing; Repeat offenders; Deterrence (search for similar items in EconPapers)
JEL-codes: D42 L11 L12 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:171:y:2020:i:c:p:153-164

DOI: 10.1016/j.jebo.2020.01.008

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