An incentive-compatibility framework for regulating a monopolist with unknown
costs is applied to the sponsor's problem of monitoring a bureau. Following Mueller,
the bureau does not make take-it-or-leave-it budget proposals to the sponsor. Rather,
the bureau must announce a marginal cost per unit of output to the sponsor. Given
that report, the sponsor chooses a price that it will pay to the bureau for each unit
of output, and the sponsor chooses the level of output as well. The analysis reveals
the price per unit of output that the sponsor must pay to the bureau to maximize
social welfare.
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