A Theory of Incentives in Procurement and Regulation

ISBN: 9780262304061 | Copyright 1993

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More then just a textbook, A Theory of Incentives in Procurement and Regulation will guide economists' research on regulation for years to come. It makes a difficult and large literature of the new regulatory economics accessible to the average graduate student, while offering insights into the theoretical ideas and stratagems not available elsewhere. Based on their pathbreaking work in the application of principal-agent theory to questions of regulation, Laffont and Tirole develop a synthetic approach, with a particular, though not exclusive, focus on the regulation of natural monopolies such as military contractors, utility companies, and transportation authorities.

The book's clear and logical organization begins with an introduction that summarizes regulatory practices, recounts the history of thought that led to the emergence of the new regulatory economics, sets up the basic structure of the model, and previews the economic questions tackled in the next seventeen chapters. The structure of the model developed in the introductory chapter remains the same throughout subsequent chapters, ensuring both stability and consistency. The concluding chapter discusses important areas for future work in regulatory economics. Each chapter opens with a discussion of the economic issues, an informal description of the applicable model, and an overview of the results and intuition. It then develops the formal analysis, including sufficient explanations for those with little training in information economics or game theory. Bibliographic notes provide a historical perspective of developments in the area and a description of complementary research. Detailed proofs are given of all major conclusions, making the book valuable as a source of modern research techniques. There is a large set of review problems at the end of the book.

This book is a major contribution to what the authors aptly call the 'new regulatory economics.' In my opinion, this literature will guide the economic research on regulation for many years to come.

Michael H. Riordan Professor of Economics, Boston University

Laffont and Tirole's book will still become a standard reference for 1980s procurement and regulation models.

R. Preston McAfee Rex G. Baker Jr. Professor of Political Economy, The University of Texas

Laffont and Tirole treat the problem of incentive regulation at a very deep level. Their book is completely up-to-date on and includes a great deal of the authors' recent, influential original research. It will be considered the research reference on incentive regulation.

Tom Palfrey Professor of Economics and Political Science, California Institute of Technology
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Contents (pg. vii)
Foreword (pg. xvii)
Acknowledgments (pg. xxiii)
Introduction (pg. 1)
I Price and Rate-of-Return Regulation (pg. 51)
1 Cost-Reimbursement Rules (pg. 53)
2 Pricing by a Single-Product Firm With and Without Budget Balance (pg. 129)
3 Pricing and Incentives in a Multiproduct Firm (pg. 165)
4 Regulation of Quality (pg. 211)
II Product Market Competition (pg. 245)
5 Cometitive Ramsey Formulas and Access Pricing (pg. 247)
6 Bypass and Cream Skimming (pg. 273)
III Bidding for Natural Monopoly (pg. 305)
7 Auctioning Incentive Contracts (pg. 307)
8 Repeated Auctions of Incentive Contracts, Investmet, and Bidding Parity (pg. 341)
IV The Dynamics of Regulation (pg. 373)
9 Dynamics Without Commitment and the Ratchet Effect (pg. 375)
10 Commitment and Renegotiation (pg. 437)
V The Politics of Regulation (pg. 473)
11 Regulatory Capture (pg. 475)
12 Cost Padding, Auditing, and Collusion (pg. 515)
13 Cartelization by Regulation (pg. 537)
14 Auctioning Design and Favoritism (pg. 559)
VI Regulatory Institutions (pg. 589)
15 Regulatory Instruments, Hearings, and Interest Group Monitoring (pg. 591)
16 Commitment and Political Accountability (pg. 619)
17 Privatization and Incentives (pg. 637)
Conclusion (pg. 661)
Review Exercises (pg. 671)
Index (pg. 695)
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