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The Effect of Awareness and Observability on the Non-contractible Investment of a Regulated Natural Monopoly

The Effect of Awareness and Observability on the Non-contractible Investment of a Regulated... This paper studies the joint effect of the regulator’s ex-ante awareness and ex-post ability to observe on the non-contractible investment activities of a natural monopoly with private marginal cost information. We show that the investment activities are lower when the regulator is ex-ante aware of their existence and ex-post able to observe them than when the regulator is never aware of, and never able to observe, them. This result, which points to the regulated firm’s prevention of ratcheting, is in line with an earlier finding of Tirole (J Polit Econ 94:235–259 1986) obtained in a bargaining model of procurement with two-sided asymmetric information. We also find that the producer welfare and the social surplus is always ex-ante higher when the regulator is unaware of its investment activities than when she is aware. Moreover, our computations show that depending on the specifications of our model, the unawareness of the regulator may positively affect the expected consumer and social welfares, as well. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png "Journal of Industry, Competition and Trade" Springer Journals

The Effect of Awareness and Observability on the Non-contractible Investment of a Regulated Natural Monopoly

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References (15)

Publisher
Springer Journals
Copyright
Copyright © 2019 by Springer Science+Business Media, LLC, part of Springer Nature
Subject
Economics; Industrial Organization; Economic Policy; R & D/Technology Policy; European Integration; Microeconomics; International Economics
ISSN
1566-1679
eISSN
1573-7012
DOI
10.1007/s10842-019-00306-3
Publisher site
See Article on Publisher Site

Abstract

This paper studies the joint effect of the regulator’s ex-ante awareness and ex-post ability to observe on the non-contractible investment activities of a natural monopoly with private marginal cost information. We show that the investment activities are lower when the regulator is ex-ante aware of their existence and ex-post able to observe them than when the regulator is never aware of, and never able to observe, them. This result, which points to the regulated firm’s prevention of ratcheting, is in line with an earlier finding of Tirole (J Polit Econ 94:235–259 1986) obtained in a bargaining model of procurement with two-sided asymmetric information. We also find that the producer welfare and the social surplus is always ex-ante higher when the regulator is unaware of its investment activities than when she is aware. Moreover, our computations show that depending on the specifications of our model, the unawareness of the regulator may positively affect the expected consumer and social welfares, as well.

Journal

"Journal of Industry, Competition and Trade" – Springer Journals

Published: May 4, 2019

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