IDEAS home Printed from
MyIDEAS: Login to save this article or follow this journal

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

  • Frank A. WOLAK
Registered author(s):

    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.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL:
    Download Restriction: no

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

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

    in new window

    Handle: RePEc:adr:anecst:y:1994:i:34:p:02
    Contact details of provider: Postal: 3, avenue Pierre Larousse, 92245 Malakoff Cedex
    Web page:

    More information through EDIRC

    No references listed on IDEAS
    You can help add them by filling out this form.

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:adr:anecst:y:1994:i:34:p:02. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Robert Gary-Bobo)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.