Games 2013, 4(3), 532-560; doi:10.3390/g4030532
Article

Multidimensional Screening with Complementary Activities: Regulating a Monopolist with Unknown Cost and Unknown Preference for Empire Building

1,3, 2 and 3,4,* email
Received: 14 August 2013; in revised form: 10 September 2013 / Accepted: 11 September 2013 / Published: 16 September 2013
(This article belongs to the Special Issue Contract Theory)
This is an open access article distributed under the Creative Commons Attribution License which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.
Abstract: We study the optimal regulation of a monopolist when intrinsic efficiency (intrinsic cost) and empire building tendency (marginal utility of output) are private information, but actual cost (the difference between intrinsic cost and effort level) is observable. This is a problem of multidimensional screening with complementary activities. Results are not only driven by the prior probabilities of the four possible types, but also by the relative magnitude of the uncertainty along the two dimensions of private information. If the marginal utility of output varies much more (less) across managers than the intrinsic marginal cost, there is empire building (efficiency) dominance. In that case, an inefficient empire builder produces more (less) and at lower (higher) marginal cost than an efficient money-seeker. It is only when variabilities are similar that there may be 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
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MDPI and ACS Style

Borges, A.P.; Laussel, D.; Correia-da-Silva, J. Multidimensional Screening with Complementary Activities: Regulating a Monopolist with Unknown Cost and Unknown Preference for Empire Building. Games 2013, 4, 532-560.

AMA Style

Borges AP, Laussel D, Correia-da-Silva J. Multidimensional Screening with Complementary Activities: Regulating a Monopolist with Unknown Cost and Unknown Preference for Empire Building. Games. 2013; 4(3):532-560.

Chicago/Turabian Style

Borges, Ana P.; Laussel, Didier; Correia-da-Silva, João. 2013. "Multidimensional Screening with Complementary Activities: Regulating a Monopolist with Unknown Cost and Unknown Preference for Empire Building." Games 4, no. 3: 532-560.

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