The Need for Regulating a Bayesian Regulator
This paper analyzes the Baron and Myerson’s (B–M) (Econometrica 50: 911–930 ) 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
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.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 28 (2005)
Issue (Month): 1 (07)
|Contact details of provider:|| Web page: http://www.springer.com|
|Order Information:||Web: http://www.springer.com/economics/industrial+organization/journal/11149/PS2|
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Koray, Semih & Sertel, Murat R., 1990. "Pretend-but-perform regulation and limit pricing," European Journal of Political Economy, Elsevier, vol. 6(4), pages 451-472.
- J. A. Mirrlees, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Oxford University Press, vol. 38(2), pages 175-208.
- 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.
- Vogelsang, Ingo, 1988. "A Little Paradox in the Design of Regulatory Mechanisms," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 29(3), pages 467-476, August.
- Myerson, Roger B, 1979.
"Incentive Compatibility and the Bargaining Problem,"
Econometric Society, vol. 47(1), pages 61-73, January.
- Roger B. Myerson, 1977. "Incentive Compatability and the Bargaining Problem," Discussion Papers 284, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Loeb, Martin & Magat, Wesley A, 1979. "A Decentralized Method for Utility Regulation," Journal of Law and Economics, University of Chicago Press, vol. 22(2), pages 399-404, October.
- 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.
- Guesnerie, Roger & Laffont, Jean-Jacques, 1984. "A complete solution to a class of principal-agent problems with an application to the control of a self-managed firm," Journal of Public Economics, Elsevier, vol. 25(3), pages 329-369, December.
- James Hagerman, 1990. "Regulation by Price Adjustment," RAND Journal of Economics, The RAND Corporation, vol. 21(1), pages 72-82, Spring.
- Vogelsang, Ingo, 2002. "Incentive Regulation and Competition in Public Utility Markets: A 20-Year Perspective," Journal of Regulatory Economics, Springer, vol. 22(1), pages 5-27, July.
- Lyon, Thomas P, 1996. "Evaluating the Performance of Non-Bayesian Regulatory Mechanisms," Journal of Regulatory Economics, Springer, vol. 9(1), pages 41-60, January.
- Lyon, T.P., 1993. "Evaluating the Performance of Non-Bayesian Regulatory Mechanisms," Papers 93-010, Indiana - Center for Econometric Model Research.
- Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, vol. 18(2), pages 301-317, August.
- Gibbard, Allan, 1973. "Manipulation of Voting Schemes: A General Result," Econometrica, Econometric Society, vol. 41(4), pages 587-601, July.
- Koray, Semih & Saglam, Ismail, 2005. "Learning in Bayesian Regulation," MPRA Paper 1899, University Library of Munich, Germany. Full references (including those not matched with items on IDEAS)