IDEAS home Printed from
   My bibliography  Save this article

Optimal regulation of technical progress in natural monopolies with asymmetric information


  • Thomas Kuhn

    () (University of Technology Chemnitz-Zwickau, D-09107 Chemnitz, Germany)

  • Uwe Cantner

    () (Institut f├╝r Volkswirtschaftslehre, University of Augsburg, Universit├Ątsstrasse 16, D-86135 Augsburg, Germany)


The focus of this paper is to characterize regulatory mechanisms for natural monopolies to provide for optimal technical progress when information is asymmetric. We model a Bayesian-Nash game where the monopolist has private knowledge of the cost-reducing effects of R&D investment to generate process innovations. In the first case, a price-regulated, profit-maximizing firm whose R&D level is unobservable sets its R&D level efficiently to maximize profits at the output level chosen by the firm. However, the level of technical progress achieved by the firm in this case is too high from the regulator's point of view since, in the second-best regulated solution of interest, the regulator has to provide for the R&D expenditures, assumed sunk, as well as for information rents transferred to the firm. In a second case, it can be shown that if the regulator can observe and set limits on the firm's investment in R&D, social welfare is improved, even though the regulated investment level is no longer efficient at the output level chosen by the firm. The reason for the welfare improvement is that losses in consumer surplus due to a decrease in output and an increase in the price are offset by a decrease in information rents and R&D costs transferred, causing the social costs of public funds to fall.

Suggested Citation

  • Thomas Kuhn & Uwe Cantner, 1999. "Optimal regulation of technical progress in natural monopolies with asymmetric information," Review of Economic Design, Springer;Society for Economic Design, vol. 4(3), pages 191-204.
  • Handle: RePEc:spr:reecde:v:4:y:1999:i:3:p:191-204 Note: Received: 31 July 1994 / Accepted: 15 January 1999

    Download full text from publisher

    File URL:
    Download Restriction: Access to the full text of the articles in this series is restricted

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    1. Moulin, Herve, 2002. "Axiomatic cost and surplus sharing," Handbook of Social Choice and Welfare,in: K. J. Arrow & A. K. Sen & K. Suzumura (ed.), Handbook of Social Choice and Welfare, edition 1, volume 1, chapter 6, pages 289-357 Elsevier.
    2. Nir Dagan, 1996. "New characterizations of old bankruptcy rules," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 13(1), pages 51-59, January.
    3. Aumann, Robert J. & Maschler, Michael, 1985. "Game theoretic analysis of a bankruptcy problem from the Talmud," Journal of Economic Theory, Elsevier, vol. 36(2), pages 195-213, August.
    4. Toru Hokari & William Thomson, 2003. "Claims problems and weighted generalizations of the Talmud rule," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 21(2), pages 241-261, March.
    Full references (including those not matched with items on IDEAS)


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. Jean-Christophe Poudou & Lionel Thomas, 2010. "On optimal regulation of price and R&D with asymmetric information," Review of Economic Design, Springer;Society for Economic Design, vol. 14(3), pages 251-269, September.

    More about this item


    Industrial regulation; technical progress; natural monopoly; institutions and incentives;

    JEL classification:

    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights
    • H42 - Public Economics - - Publicly Provided Goods - - - Publicly Provided Private Goods


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:reecde:v:4:y:1999:i:3:p:191-204. 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: (Sonal Shukla) or (Rebekah McClure). General contact details of provider: .

    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.

    We have no references for this item. You can help adding them by using 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 RePEc Author Service 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.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.