David E. M. Sappington

Privatization, information and incentives

In this paper the choice between public and private provision of goods and services is considered. In practice, both modes of operation involve significant delegation of authority, and thus appear quite similar in some respects. The argument here is that the main difference between the two modes concerns the transactions costs faced by the government when attempting to intervene in the delegated production activities. Such intervention is generally less costly under public ownership than under private ownership. The greater ease of intervention under public ownership can have its advantages; but the fact that a promise not to intervene is more credible under private production can also have beneficial incentive effects. The fundamental privatization theorem (analogous to the fundamental theorem of welfare economics) is presented, providing conditions under which government production cannot improve upon private production. The restrictiveness of these conditions is evaluated.

Limited liability contracts between principal and agent

Abstract The optimal strategy of the principal is examined in an environment where there are ( ex post ) limitations on the maximum penalty that can be imposed on a riskneutral agent. Contrary to the case in which such limitations are not imposed, it is in the principals interest to deliberately forego the opportunity to induce socially efficient behavior, and to instead design a contract that induces the agent to realize an efficient outcome only in the most productive state of nature and (perhaps) in certain very unproductive states. The properties of the contract are examined in detail.

Countervailing incentives in agency problems

Abstract We analyze countervailing incentives in agency problem. Countervailing incentives exist when the agent has an incentive to understate his private information for some of its realizations, and to overstate it for others. When countervailing incentives arise, pooling generally characterizes the equilibrium contract. Furthermore, performance is distorted both above and below efficient levels. In addition, the agents rents generally increase with the realization of his private information over some ranges, and decrease over other ranges. We demonstate that the creation of countervailing incentives can enhance aggregate welfare.

Optimal incentive contracts with multiple agents

Abstract A setting in which a single principal contracts with two agents who possess perfect private information about their own productivity is considered. With correlated productivities, each agents private information also provides a signal about the other agents productivity. In contrast to the setting in which there is only one agent, it is shown that such private information may be of no value to the agents. It is only if the agents are risk-averse that their private information may allow them to command rents. Moreover, when the agents are constrained only to reveal their private information truthfully as a Nash equilibrium, the Pareto optimal incentive scheme may induce the agents to adopt strategies other than truth-telling. This leads to the consideration of truth-telling equilibria that are not Pareto dominated in the subgame played by the agents. Among all such equilibria, the one preferred by the principal restricts one agent to tell the truth as a dominant strategy and the other as a Nash response to truth.

Supplying Information to Facilitate Price Discrimination

The authors examine the incentive of a seller to allow potential buyers to acquire private information about their tastes for the sellers product. Improved private information for buyers enables the seller to segment the market and charge higher prices to high-value buyers. However, improved information can also provide rents to buyers. In a variety of settings, this tradeoff is optimally resolved at one of two extremes: either buyers are supplied with the best available knowledge of their tastes or no information is supplied by the seller. Copyright 1994 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Information management in incentive problems

We extend the standard procurement model to examine how an agent is optimally induced to acquire valuable planning information before he choose an unobservable level of cost‐reducing effort. Concerns about information acquisition cause important changes in standard incentive contracts. Reward structures with extreme financial payoffs arise, and super‐high‐powered contracts are coupled with contracts that entail pronounced cost sharing. However, if the principal can assign the planning and production tasks to two different agents, then all contracting distortions disappear and, except for forgone economies of scope, the principal achieves her most preferred outcome.

The Impact of State Incentive Regulation on the U.S. Telecommunications Industry

We examine the impact of state incentive regulation on network modernization, aggregate investment, revenue, cost, profit, and local service rates in the U.S. telecommunications industry between 1986 and 1999. We find evidence of greater network modernization under price cap regulation (PCR), earnings sharing regulation (ESR), and rate case moratoria (RCM) than under rate of return regulation (RORR). Costs are generally lower under RCM. Costs are also lower under ESR and PCR when local competition is sufficiently intense. Some local service rates for business customers are lower under PCR. Revenue, profit, aggregate investment, and residential local service rates do not vary systematically under incentive regulation relative to RORR.

The effects of incentive regulation in the telecommunications industry: A survey

We review recent empirical studies of the performance of incentive regulation in the telecommunications industry. These studies provide evidence that productivity, infrastructure investment, profit levels, telephone penetration, and new service offerings have increased under incentive regulation. Service rates have generally remained stable or decreased slightly, and service quality does not appear to have been affected adversely. There is no evidence that incentive regulation has led to streamlined regulatory proceedings. Strong evidence that incentive regulation has reduced the costs of providing telephone service has not yet materialized.

Efficient Awards and Standards of Proof in Judicial Proceedings

We view the court system as an institution that enables defendants to signal their innocence or guilt, and we examine how the court can optimally minimize expected social losses from errors of type I and type II and from expenditures by defendants. Two of the policy instruments assumed available to the court are the standard of proof of ones innocence and the penalty imposed on a defendant who fails to meet the standard. Our analysis focuses on the effects that variations in the levels of these instruments have on the expenditures of defendants.

Managing Supplier Switching

To examine the potential gains from a second production source, we examine how source switching is optimally structured. The model focuses on a purchaser who manages the acquisition process, an incumbent supplier, and a potential entrant or second supplier. Because the costs of the incumbent and second source are correlated, the entrants costs provide an informative signal about the incumbents costs. Judicious use of this information allows the purchaser to limit the incumbents rents. Because entry also provides an alternative source of production, however, there are important distinctions between the optimal entry policy and the optimal auditing policy. One of our findings is that it may be optimal to replace the incumbent, even when the entrant is known to have higher production costs.