Explaining Escalating Prices and Fines: A Unified Approach
Journal
Journal of Economic Behavior & Organization
Type
journal article
Date Issued
2020
Author(s)
Abstract
This paper provides an explanation for escalating prices and fines based on a unified analytical framework that nests monopoly pricing and optimal law enforcement. We show that escalation emerges as an optimal outcome if the principal (i) lacks commitment ability, and (ii) gives less than full weight to agent benefits. Escalation is driven by decreasing transfers for non-active agents rather than increasing transfers for active agents. Some forward-looking agents then strategically delay their activity, which drives a wedge between the optimal static transfer and the benefit of an indifferent agent. This wedge is the source of escalation.
Language
English
HSG Classification
contribution to scientific community
HSG Profile Area
SEPS - Economic Policy
Refereed
Yes
Publisher
Science Direct
Volume
171
Start page
153
End page
164
Subject(s)
Eprints ID
259498