Commitment and Fairness in a Dynamic Regulatory Relationship.

This paper considers a multiperiod model of a regulated firm that has (stationary) private inf ormation, which may be revealed through performance. A "Fairness" arrangement is proposed in which the firm agrees not to quit if in future periods the regulator allows it to earn a nonnegative profit given the type it revealed in earlier periods. The properties of such arrangements are studied, and an example is presented in which both the firm and the regulator prefer a fairness arrangement to a policy feasible without commitment. Copyright 1987 by The Review of Economic Studies Limited.