Commitment and Fairness in a Dynamic Regulatory Relationship

David P. Baron · David A. Besanko

144 citations0/0 files storedThe Review of Economic Studies

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Regulation and Compliance Studies Merger and Competition Analysis Law, Economics, and Judicial Systems

Abstract

This paper considers a multiperiod model of a regulated firm that has (stationary) private inf ormation, which may be revealed through performance. A "Fairness" arrangement is proposed in which the firm agrees not to quit if in future periods the regulator allows it to earn a nonnegative profit given the type it revealed in earlier periods. The properties of such arrangements are studied, and an example is presented in which both the firm and the regulator prefer a fairness arrangement to a policy feasible without commitment. Copyright 1987 by The Review of Economic Studies Limited.

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References

1977Rules Rather than Discretion: The Inconsistency of Optimal Plans 1975Reexamination of the perfectness concept for equilibrium points in extensive games 1979Optimal contracts and competitive markets with costly state verification 1996Credible Commitments: Using Hostages to Support Exchange 1979Incentive Compatibility and the Bargaining Problem 1982Regulating a Monopolist with Unknown Costs 1986Using Cost Observation to Regulate Firms 1979The Implementation of Social Choice Rules: Some General Results on Incentive Compatibility

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1989Delegation as Commitment: The Case of Income Tax Audits 1988Economic Theories of the Firm: Past, Present, and Future 1988Government Intervention in Production and Incentives Theory: A Review of Recent Contributions 1989Diversification Incentives under "Price-Based" and "Cost-Based" Regulation 1994The Dynamic Efficiency of Regulatory Constitutions 1997The Impact of Economics on Contemporary Political Science

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