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Research Details
Commitment and Fairness in a Continuing Regulatory Relationship, Review of Economic Studies
Abstract
This paper considers a multiperiod model of a regulated firm that has (stationary) private reformation which may be revealed through performance. If it cannot make commitments to future policies, the regulator has an incentive to exploit any information the firm reveals, and Laffont and Tirole show that there is no regulatory policy that is separating over any closed interval. 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.
Type
Article
Author(s)
David Baron, David Besanko
Date Published
1987
Citations
Baron, David, and David Besanko. 1987. Commitment and Fairness in a Continuing Regulatory Relationship. Review of Economic Studies.(179): 413-437.