In this paper we consider the problem of financing infrastructure when the regulator faces a budget constraint. The optimal budget-constrained mechanism satisfies four properties. The first property is bunching at the top, that is the more efficient firms produce the same quantity. The second property is self-selection for the less efficient firms. The third property is that the mechanism is a third best one. In other words, as long as the budget-constraint is binding, the optimal output is strictly lower than the second best output for any given type. Finally, if the budget constraint is too strong, then we have a full bunching solution.
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Paper provided by University of Bonn, Germany in its series Bonn Econ Discussion Papers with number
bgse15_2002.
Length: 18 Date of creation: Jun 2002 Date of revision: Handle: RePEc:bon:bonedp:bgse15_2002
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