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Can regulation increase firm's efficiency?

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  • Giuseppe Coco
  • Claudio De Vincenti

Abstract

This paper examines the possibility that regulation actually increases a monopolist’s cost-efficiency. When the firm’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 Info

Paper provided by University of Rome La Sapienza, Department of Public Economics in its series Working Papers with number 60.

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Length: 29
Date of creation: Feb 2002
Date of revision:
Handle: RePEc:sap:wpaper:wp60

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Related research

Keywords: Price-cap; regulatory lag.;

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References

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  1. Paolo Bertoletti, 2002. "Why Regulate Prices? Some Notes on the Price Cap Methods," Rivista di Politica Economica, SIPI Spa, vol. 92(2), pages 13-30, March-Apr.
  2. Mark Armstrong & Simon Cowan & John Vickers, 1994. "Regulatory Reform: Economic Analysis and British Experience," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262510790, January.
  3. Bradley, Ian & Price, Catherine, 1988. "The Economic Regulation of Private Industries by Price Constraints," Journal of Industrial Economics, Wiley Blackwell, vol. 37(1), pages 99-106, September.
  4. Crew, Michael A & Kleindorfer, Paul R, 2002. "Regulatory Economics: Twenty Years of Progress?," Journal of Regulatory Economics, Springer, vol. 21(1), pages 5-22, January.
  5. Claudio De Vincenti, 2002. "Non solo energia e telecomunicazioni: i problemi della transizione avviata nella regolazione delle altre utilities," ECONOMIA PUBBLICA, FrancoAngeli Editore, vol. 2002(4).
  6. Armstrong, Mark & Vickers, John, 2000. "Multiproduct Price Regulation under Asymmetric Information," Journal of Industrial Economics, Wiley Blackwell, vol. 48(2), pages 137-60, June.
  7. Gindin, Sam, 1970. " A Model of the Soviet Firm," Economic Change and Restructuring, Springer, vol. 10(3), pages 145-57.
  8. Vogelsang, Ingo, 1997. "Introduction," Information Economics and Policy, Elsevier, vol. 9(2), pages 97-102, June.
  9. Boitani Andrea & Cambini Carlo, 2002. "Regolazione incentivante per i servizi di trasporto locale," Politica economica, Società editrice il Mulino, issue 2, pages 193-226.
  10. Armstrong, Mark & Sappington, David E.M., 2007. "Recent Developments in the Theory of Regulation," Handbook of Industrial Organization, Elsevier.
  11. Laura Cavallo & Giuseppe Coco, 2002. "La remunerazione del capitale investito nelle imprese soggette a regolazione," ECONOMIA PUBBLICA, FrancoAngeli Editore, vol. 2002(4).
  12. Sappington, David E M & Sibley, David S, 1988. "Regulating without Cost Information: The Incremental Surplus Subsidy Scheme," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 29(2), pages 297-306, May.
  13. Cowan, Simon, 1997. "Price-Cap Regulation and Inefficiency in Relative Pricing," Journal of Regulatory Economics, Springer, vol. 12(1), pages 53-70, July.
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