Multidimensional screening with complementary activities: regulating a monopolist with unknown cost and unknown preference for empire-building

Ana Borges (), Didier Laussel () and Joao Correia-da-Silva

FEP Working Papers from Universidade do Porto, Faculdade de Economia do Porto

Abstract: We study optimal regulation of a monopolist when intrinsic efficiency (intrinsic cost) and empire-building tendency (marginal utility of output) are private information but actual cost (difference between intrinsic cost and effort level) is observable. This is a problem of multidimensional screening with complementary activities. Results are mainly driven by two elements: the correlations between types; and the relative magnitude of the uncertainty along the two dimensions of private information. If the marginal utility of output varies much more (resp. less) across managers than the intrinsic marginal cost, then we have empire-building (resp. efficiency) dominance. In that case, an inefficient empire-builder produces more (resp. less) and at lower (resp. higher) marginal cost than an efficient money-seeker. It is only when variabilities are similar that we obtain the natural ranking of activities (empire-builders produce more while efficient managers produce at a lower cost).

Keywords: Multidimensional screening; regulation; procurement; empire-building; adverse selection. (search for similar items in EconPapers)
JEL-codes: D82 H42 L51 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2013-02
New Economics Papers: this item is included in nep-cta, nep-mic and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Multidimensional Screening with Complementary Activities: Regulating a Monopolist with Unknown Cost and Unknown Preference for Empire Building (2013)
Working Paper: Multidimensional Screening with Complementary Activities: Regulating a Monopolist with Unknown Cost and Unknown Preference for Empire Building (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:por:fepwps:486

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