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The Need for Regulating a Bayesian Regulator

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  • Semih Koray

    ()

  • Ismail Saglam

Abstract

This paper analyzes the Baron and Myerson’s (B–M) (Econometrica 50: 911–930 [1982]) scheme of monopoly regulation, a standard representative of Bayesian mechanisms. As is well known, the hboxB–M mechanism (and other related mechanisms) have as an explicit starting point the assumption that the regulator has an unchallenged prior belief about the cost function of the regulated monopolist.We analyze here the consequences resulting from the possibility that this prior belief may be subject to influence or manipulable. As we show in detail, under the B–M scheme, consumers and the regulated monopoly are highly sensitive to the regulator’s prior belief about the (private) cost information of the monopolist. Therefore, if a regulator’s beliefs are unaccountable to and unverifiable by a higher ity, the regulator has both the incentive and the possibility to change and/or misrepresent his prior belief when facing pressure or payoffs from interest groups representing consumers or the regulated firm. The results here show that the outcomes under a B–M mechanism favoring one or another interest group can vary over a wide spectrum. The results are consistent with capture theory and rent-seeking explanations of monopoly regulation and suggest the need to exercise care in using the insights and results of Bayesian regulatory theory to inform practice. Copyright Springer Science+Business Media, Inc. 2005

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File URL: http://hdl.handle.net/10.1007/s11149-005-2353-z
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Bibliographic Info

Article provided by Springer in its journal Journal of Regulatory Economics.

Volume (Year): 28 (2005)
Issue (Month): 1 (07)
Pages: 5-21

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Handle: RePEc:kap:regeco:v:28:y:2005:i:1:p:5-21

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Web page: http://www.springerlink.com/link.asp?id=100298

Related research

Keywords: Bayesian mechanism; manipulable beliefs; monopoly; moral hazard; regulation;

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Cited by:
  1. repec:ebl:ecbull:v:3:y:2007:i:12:p:1-10 is not listed on IDEAS
  2. Flavio M. Menezes & Christian Roessler, 2010. "Good and Bad Consistency in Regulatory Decisions," The Economic Record, The Economic Society of Australia, vol. 86(275), pages 504-516, December.
  3. Koray, Semih & Saglam, Ismail, 2005. "Learning in Bayesian Regulation," MPRA Paper 1899, University Library of Munich, Germany.
  4. Ismail Saglam & Semih Koray, 2007. "Learning in Bayesian regulation: desirable or undesirable?," Economics Bulletin, AccessEcon, vol. 3(12), pages 1-10.
  5. Ingo Vogelsang, 2006. "Electricity Transmission Pricing and Performance-based Regulation," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 97-126.
  6. Luis C. Corchon, 2007. "The theory of implementation : what did we learn?," Economics Working Papers we081207, Universidad Carlos III, Departamento de Economía.
  7. Chisari, Omar & Ferro, Gustavo, 2011. "Tópicos de Economía de la Regulación de los Servicios Públicos," UADE Textos de Discusión 65_2011, Instituto de Economía, Universidad Argentina de la Empresa.

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