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An Econometric Analysis of the Asymmetric Information, Regulator-Utility Interaction

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  • Frank A. WOLAK
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    Abstract

    This paper presents procedures for estimating the parameters of a regulated firm's production function which explicitly model the impact of the private information possessed by utility in the regulatory process. The paper derives the optimal regulatory outcome for two cases: (1) the utility's private information is observable by the regulator and (2) only the distribution of the private information is observable by the regulator. Given a parametric form for the utility's production function, these optimal regulatory outcomes yield structural econometric models which can be estimated to recover the parameters of the regulated firm's production function. These models are estimated for the Class A California water utility industry, and the parameter estimates obtained are compared to those obtained from applying conventional cost-function estimation procedures. This estimation procedure recovers the parameters of the utility's production function as well as an estimate of the distribution function of the utility's private information parameter. Using a non-nested hypothesis testing procedure we find that the second private information model provides a superior description of the observed level of costs and output. The estimates from these models are then used to compute the increased production costs and output reduction which result from the utility's superior private information about its production process. We find noticeable, but not overwhelming, percentage cost increases introduced by this private information in the regulatory process. The major effect is the welfare loss to consumers from the reduction in output produced under asymmetric information versus symmetric information.

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    Bibliographic Info

    Article provided by ENSAE in its journal Annals of Economics and Statistics.

    Volume (Year): (1994)
    Issue (Month): 34 ()
    Pages: 13-69

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    Handle: RePEc:adr:anecst:y:1994:i:34:p:02

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    Cited by:
    1. Gagnepain, Philippe & Ivaldi, Marc & Martimort, David, 2010. "The cost of contract renegotiation: Evidence from the local public sector," CEPR Discussion Papers 8042, C.E.P.R. Discussion Papers.
    2. Serge Garcia, 2002. "Rendements et efficacité dans les industries en réseau : le cas des services d'eau potable délégués," Économie et Prévision, Programme National Persée, vol. 154(3), pages 123-138.
    3. Ayako Suzuki, 2012. "Yardstick Competition to Elicit Private Information: An Empirical Analysis," Review of Industrial Organization, Springer, vol. 40(4), pages 313-338, June.
    4. Karaivanov, Alexander, 2012. "Financial constraints and occupational choice in Thai villages," Journal of Development Economics, Elsevier, vol. 97(2), pages 201-220.
    5. repec:hal:psewpa:hal-00710639 is not listed on IDEAS
    6. Anna L. Paulson & Robert Townsend, 2003. "Distinguishing limited commitment from moral hazard in models of growth with inequality," Working Paper Series WP-03-06, Federal Reserve Bank of Chicago.
    7. Francesco, Gastaldi & Lucia, Quaglino & Carlo, Stagnaro, 2012. "Il trasporto pubblico locale e la concorrenza. Cambiare paradigma per salvare il servizio: il caso ligure
      [Local Public Transportation and Competition. Changing Paradigm to Save the Service: The Ca
      ," MPRA Paper 49464, University Library of Munich, Germany.
    8. Pérez Montes, Carlos, 2013. "Regulatory bias in the price structure of local telephone service," International Journal of Industrial Organization, Elsevier, vol. 31(5), pages 462-476.

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