Regulatory Auditing and Ramsey Pricing

Truthful revelation mechanisms with auditing have the undesirable property that audits are not actually performed in equilibrium because all inference problems have been solved. A model is proposed in which the inference problem is preserved by separating the regulatory and auditing functions and transfers are costly. The auditor designs a Bayesian audit procedure and the regulator credibly commits to using this procedure in the regulatory mechanism. The auditor is conservative, that is, he does not like to make mistakes for his client. Second-best allocation is achieved over a well-defined auditing region of the regulator's prior beliefs about firm type. The auditing region is increasing in the precision of the auditing technology and is decreasing in the strength of the regulator's prior beliefs.

Incomplete Enforcement with Endogenous Regulatory Choice

This paper extends the economic literature on the incomplete enforcement of social regulation by incorporating regulatory choice in an institutional environment of limited regulatory resources and powers. We show how regulatory decisions determine the structure of incentives faced by regulated firms. Our results indicate that the expense of monitoring relative to the regulator's power to levy penalties helps to explain the differences between 'compliance* and "deterrence' enforcement styles. We find that in most circumstances firms with higher abatement costs will receive a larger share of regulatory resources and thus face higher penalties than firms with lower costs

Public Firms as Regulatory and Auditing Instruments

We re-examine the regulatory role of a public firm in an environment of private but correlated information about industry costs. We study three regimes of mixed market interaction involving both public and private firms: a symmetric Bayesian-Nash equilibrium, an asymmetric Bayesian equilibrium in which the public firm is able to commit to production before the private firms and a mechanism in which the regulator designs an incentive compatible schedule for the industry. We find that a public firms plays an important strategic informational role which strengthens its role as a disciplinary regulatory instrument. Further, we find that this strategic informational role is considerably enchanced as we move from indirect regulatory schemes to direct regulation.

Incomplete Enforcement with Endogenous Regulatory Choice

This paper extends the economics literature on the incomplete enforcement of social regulation by incorporating regulatory choice in an institutional environment of limited regulatory resources and powers. We show how regulatory decisions determine the structure of incentives faced by regulated firms. Our results indicate that the expense of monitoring relative to the regulator's power to levy penalties helps to explain the differences between "compliance" and "deterrence" enforcement styles. We find that in most circumstances firms with higher abatement costs will receive a larger share of regulatory resources and thus face higher penalties than firms with lower costs.

Public Firms as Regulatory Instruments with Cost Uncertainty.

We re-examine the regulatory role of a public firm in an environment of private but correlated information about industry costs. We study three regimes of mixed-market interaction involving both public and private firms: a symmetric Bayesian-Nash equilibrium, an asymmetric Bayesian equilibrium in which the public firm is able to commit to production before the private firms, and a mechanism in which the regulator designs an incentive-compatible schedule for the industry. We find that a public firm plays an important strategic informational role which strengthens its role as a disciplinary regulatory instrument. Further, we find that this strategic informational role is considerably enhanced as we move from indirect regulatory schemes to direct regulation.