Hierarchical Regulatory Control

Joel S. Demski and David Sappington

RAND Journal of Economics, 1987, vol. 18, issue 3, 369-383

Abstract: We consider a regulatory problem in which there is a hierarchy of control. Consumers (or Congress) direct the activities of a regulator, who, in turn, oversees the activities of a monopolistic firm. Both the regulator and the firm are self-interested actors. The regulator must be motivated to acquire the expertise that allows him to control the firm's activities more effectively. The firm must be motivated to produce at minimal cost to consumers. We characterize the distortions in the firm's activities that are optimally induced to control more effectively the activities of the firm and the regulator.

Date: 1987
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