Working Paper No. 573

Regulation of Cost and Quality under Yardstick Competition

Published: January 23, 2002Pages: 41Keywords: Yardstick Competition; Quality; Regulation JEL-codes: D82; I11; I18; L51

Regulation of Cost and Quality under Yardstick Competition Thomas P. Tangerås


This paper analyses simultaneous regulation of cost and quality when firms have private, correlated information about productivity and the regulator receives a signal about quality. It is shown that managerial effort and expenditures on quality are positively correlated in the optimal contract. The higher is firm productivity the more should the firm spend on quality improvement and the more efficiently should it produce. Optimal yardstick competition reduces distortion of both effort and quality. Under product market competition expenditures on quality should be increasing in the firm's own productivity and decreasing in the competitor's productivity.

Interdisciplinary European Studies

The European Union in a Changing World Order

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This book explores how the European Union responds to the ongoing challenges to the liberal international order. These challenges arise both within the EU itself and beyond its borders, and put into question the values of free trade and liberal democracy. 

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