The public management of risk: Separating ex ante and ex post monitors

Abstract

SummaryWhen a firm undertakes risky activities, the conflict between social and private incentives to implement safety care requires public intervention which can take the form of both monetary incentives but also ex ante or ex post monitoring, i.e., before or after an accident occurs. We delineate the optimal scope of monitoring depending on whether public monitors are benevolent or corruptible. We show that separating the ex ante and the ex post monitors increases the likelihood of ex post investigation, helps prevent capture and improves welfare. Keywords AbstractWhen a firm undertakes risky activities, the conflict between social and private incentives to implement safety care requires public intervention which can take the form of both monetary incentives but also ex ante or ex post monitoring, i.e., before or after an accident occurs. We delineate the optimal scope of monitoring depending on whether public monitors are benevolent or corruptible. We show that separating the ex ante and the ex post monitors increases the likelihood of ex post investigation, helps prevent capture and improves welfare.

Weak Enforcement of Environmental Policies: A Tale of Limited Commitment and Limited Fines

“…28 Taking a multiprincipal mechanism design perspective, Khalil, Martimort and Parigi (2007) develop a model of financial contracting between several auditors and show that there may be more or less audit in equilibrium compared with what would arise under cooperative contracting. Hiriart, Martimort and Pouyet (2009a) investigate the substitutability or the complementarity between various auditors acting either ex ante (before an accident) or ex post (after), whereas Hiriart, Martimort and Pouyet (2009b) endogenize why auditors should be split.…”

“…Instead Hiriart, Martimort and Pouyet (2009b) justify the separation between regulators and judges as an optimal way of preventing collusion. They also draw the consequences of such a fragmented institutional design for monitoring strategies.…”

Assessing Risks and Regulating Safety Standards in the Oil and Gas Industry: The Peruvian Experience

“…Economic theory establishes that the optimal level of safety monitoring and the optimal values of penalties for safety infringements are determined by solving the problem of the regulator who looks for maximizing expected social welfare (the objective of a benevolent State) subject to budget constraints, information restrictions guaranteeing that the company participate in the regulatory scheme and that the company's incentives be compatible with the regulator's objective (Hölmstrom 1979), limited liability constraints that are established in corporate law (Shavell 1987) and other restrictions related to the political environment (Tirole 1986, Hiriart et al 2010, Vásquez 2012.…”

Corruption and the Regulation of Innovation

“…Immordino and Pagano (2010) compare the regulatory standard chosen by benevolent and self-interested regulators when public officials can be corrupt and find evidence consistent with the benevolent regulator's model. Hiriart et al (2010) show that ex-ante and ex-post monitors, i.e. regulators and courts, should be two separate entities and determine the set of transfers and fines which deter collusion.…”