Can regulation increase firm's efficiency?
AbstractThis paper examines the possibility that regulation actually increases a monopolistâ€™s cost-efficiency. When the firmâ€™s cost-reducing effort depends on the output supplied, a binding price-cap, by compelling the monopolist to produce more, finally results in lower costs. On the basis of a two-period asymmetric information model with a repeated choice of effort, the paper demonstrates that regulation increases efficiency when the elasticity of demand is sufficiently low, even assuming very conservative preferences and a very poor information set for the regulator. Moreover, contrary to previous findings and conventional wisdom, we find that a periodical rate base review exerts also a positive effect on future cost-reducing effort countervailing the well known ratchet effect.
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Bibliographic InfoPaper provided by University of Rome La Sapienza, Department of Public Economics in its series Working Papers with number 60.
Date of creation: Feb 2002
Date of revision:
Price-cap; regulatory lag.;
Find related papers by JEL classification:
- L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
- D42 - Microeconomics - - Market Structure and Pricing - - - Monopoly
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