Bernard Caillaud

Government Intervention in Production and Incentives Theory: A Review of Recent Contributions

This article reviews the recent literature on regulation under asymmetric information. We first develop the conceptual framework and offer a reminder of the techniques used in the field. Then we apply the framework and techniques to a variety of situations -- with or without commitment. We conclude with a discussion of desirable directions for research.

Parties as Political Intermediaries

This paper argues that parties regulate competition among Hke-minded factions so as to enhance reputation building by, and voter trust in, the politicians standing for a given cause. While intra- and interparty competition contributes to keeping politicians on their toes, unbridled competition may encourage politicians to challenge good platforms and to wage competition along socially suboptimal dimensions (for example, by privileging form over content). The paper builds a simple model of intraparty competition and studies whether various hierarchical or democratic party institutions constitute an efficient form of party governance. The paper shows that intraparty disagreements, when they occur, hurt the partys position in the general election, but that their possibility enhances party image; and that parties must be able to avoid behind-the-scene allocations of portfolios and spoils in order to be credible. Last, it analyzes the impact of political polarization and interparty competition on the choice of party governance.

Noisy Observation in Adverse Selection Models

We consider a principal-agent contracting problem under incomplete information where some of the agents actions are imperfectly observable. Contracts take the form of reward schedules based on the noisy observation of the agents action. We first review situations where the principal can reach the same utility as in the absence of noise. Then we focus on the use of linear reward schedules, which allow universal implementation, i.e. implementation of a given mechanism for any unbiased noise of observation, and on quadratic reward schedules, which only require the knowledge of the variance of the noise. We exhibit sufficient conditions under which linear reward schedules implement a given mechanism. Finally, we characterize necessary conditions for a mechanism to be implementable under noisy observation by a linear schedule, and by quadratic schedules. We give the geometric intuition behind all results.

Equilibrium reserve prices in sequential ascending auctions

Abstract We study a model where bidders have perfectly correlated valuations for two goods sold sequentially in two ascending-price auctions. The seller sets a reserve price before the beginning of each auction. Despite the lack of commitment by the seller, we characterize an equilibrium and study its properties. Strategic non-disclosure of information takes the form of non-participation in the early auction by low-valuation bidders, while high-valuation bidders bid up to their true valuations. Some buyers who would profitably buy at the reserve price refrain from participating in order to decrease the second-auction reserve price.

Strategic aspects of vertical delegation

Abstract This paper offers an overview of the strategic aspects of situations where, either institutionally or contractually, a firm delegates some of its decisions to another firm, a subsidiary, an internal division, etc. Delegation may have several kinds of strategic benefits: in the short-term, it may improve the competitive position of the firm, or induce a more lenient behavior from its competitors; in the long-run, it may be used to deter the entry of potential competitors, to foreclose market access or to induce actual competitors to exit. The paper analyzes the trade-off between these possible benefits and the agency costs of delegation, and emphasizes the key issues of credibility and commitment.

Regulation, competition, and asymmetric information

Abstract This article studies a model of regulation under asymmetric information when there exists a competitive fringe of unregulated alternative producers. The correlation between the unknown cost parameters of the fringe and of the regulated firm allows the regulator to use the threat of entry by the fringe to reduce the informational cost of regulation. The presence of the fringe is welfare enhancing. The allocative distortions can be larger or smaller than those in the no-fringe case, and the optimal contract sometimes allows inefficient entry. The optimal contract can exhibit non-standard bunching phenomena and discontinuities.

Essential Facility Financing and Market Structure

The Paper analyses the funding of an infrastructure project (high speed train line, platform, tunnel, harbor, regional airport, fibre-to-the-home network, etc.) in a situation in which an incumbent operator has private information about market profitability (demand, cost) and the infrastructure owner is subject to a budget constraint, either on a per project basis or over the entire infrastructure. An open access policy raises welfare, but may make the project non-viable since funding must be provided by capital contributions and access charges. The infrastructure owner can ask the incumbent for a higher capital contribution if the latter insists on an exclusive use. Yet, such screening is at odds with social goals: The incumbent is willing to pay more for exclusivity, the higher the demand (the lower the cost), that is precisely when competition yields the highest benefits. At the optimum, the incumbents information impacts the decision of whether to build the infrastructure, but is not used to determine market structure. The Paper further shows that an absence of long-term licencing favours monopoly franchising, while a threat of regulatory capture creates an open-access presumption.

National vs European incentive policies: Bargaining, information and coordination

Abstract We build a hierarchical model of contractual relationships under moral hazard to address issues about subsidiarity, i.e. optimal (de)centralization of incentive industrial policies at the national level or at the European Community level. Incentive policy is viewed as an incentive contract for producers who take unobservable decisions that have spillover effects across Member States. A Community Agency designs contracts for producers and contractual compensatory transfers between States on the basis of its observations; then national regulators and their home producers negotiate, according to a generalized Nash bargaining, a national contract that complements the Community contracts, given that national regulators will have access to more observations on the producers activities. In this setting, we show that full centralization is never optimal; we give sufficient conditions for complete decentralization to be optimal; and when both policies are present, we characterize how they interact to provide incentives to producers.

Modelling Time Inconsistent Preferences

The paper reviews some recent theoretical contributions on the modelisation of time-inconsistent preferences, as well as implications for individual behavior. The focus is on the interpretation of the concepts and the link with concepts in psychology.

Hierarchical organization and incentives

Abstract We study decentralization in public decision-making as the possibility for local authorities to sign incentive contracts with local agents in a context of asymmetric information. We first review some theoretical arguments put forward for the optimality of decentralized structures. We then present a model of organization of incentive policy in the EU context, where national authorities have better information on their agents but less bargaining power than central authorities at the community level; we show the complementarities between both levels of regulation.