Dynamic Regulation of Public Good Quality

38 Pages Posted: 27 Mar 2006

See all articles by Stéphane Auray

Stéphane Auray

CREST-Ensai

Thomas Mariotti

University of Toulouse I

Fabien Moizeau

Université Paris I Panthéon-Sorbonne - Equipe Universitaire de Recherche en Economie Quantitative (EUREQUA)

Date Written: March 2006

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

JEL Classification: D82, L15, L51

Suggested Citation

Auray, Stéphane and Mariotti, Thomas and Moizeau, Fabien, Dynamic Regulation of Public Good Quality (March 2006). Available at SSRN: https://ssrn.com/abstract=892586 or http://dx.doi.org/10.2139/ssrn.892586

Stéphane Auray (Contact Author)

CREST-Ensai ( email )

15 Boulevard Gabriel Peri
Malakoff Cedex, 1 92245
France

Thomas Mariotti

University of Toulouse I ( email )

Toulouse, 31000
France

Fabien Moizeau

Université Paris I Panthéon-Sorbonne - Equipe Universitaire de Recherche en Economie Quantitative (EUREQUA) ( email )

106-112 Boulevard de l'Hopital
Paris Cedex 13, 75647
France

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