Incomplete Contracting and Price--Cap Regulation
This paper deals with price--cap regulation of a monopolistic distribution grid which sells a license to some retailer. The sale of the license is a long--term incomplete contract. Both the grid and the licensee engage in relationship--specific investments before the value and costs of the license are known. The resulting hold--up problem can be solved by the regulator by choosing a particular RPI - X regulation and forbidding renegotiation of the contract. The optimal price--cap regulation of the incomplete contract looks quite different from the usual RPI - X case which stipulates a functional relationship between a particular cost or productivity realization and a regulatory instrument X, without any dependence on further exogenous variables. In this paper, however, the Xs depend on many more exogenous variables, be it further realizations of costs and values, be it optimal probabilities of these realizations. If the regulator is only interested in efficient trade and efficient relationship--specific investments, moreover, the no--trade price, as chosen by grid and licensee, directly determines the values of the Xs.
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|Date of creation:||Oct 1995|
|Date of revision:|
|Contact details of provider:|| Postal: Bonn Graduate School of Economics, University of Bonn, Adenauerallee 24 - 26, 53113 Bonn, Germany|
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References listed on IDEAS
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- Nöldeke, Georg & Schmidt, Klaus M., 1995.
"Option contracts and renegotiation: A solution to the Hold-Up Problem,"
Munich Reprints in Economics
19329, University of Munich, Department of Economics.
- Georg Noldeke & Klaus M. Schmidt, 1995. "Option Contracts and Renegotiation: A Solution to the Hold-Up Problem," RAND Journal of Economics, The RAND Corporation, vol. 26(2), pages 163-179, Summer.
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- Oliver Hart & John Moore, 1985.
"Incomplete Contracts and Renegotiation,"
367, Massachusetts Institute of Technology (MIT), Department of Economics.
- Bos, Dieter & Lulfesmann, Christoph, 1996. " The Hold-Up Problem in Government Contracting," Scandinavian Journal of Economics, Wiley Blackwell, vol. 98(1), pages 53-74, March.
- Tirole, J., 1993.
"The Internal Organization of Government,"
93-11, Massachusetts Institute of Technology (MIT), Department of Economics.
- Dieter Bös, 1996. "Incomplete Contracting and Target-Cost Pricing," Discussion Paper Serie A 524, University of Bonn, Germany.
- Aghion, Philippe & Dewatripont, Mathias & Rey, Patrick, 1994.
"Renegotiation Design with Unverifiable Information,"
Econometric Society, vol. 62(2), pages 257-82, March.
- Mathias Dewatripont & Philippe Aghion & Patrick Rey, 1994. "Renegotiation design with unverifiable information," ULB Institutional Repository 2013/9591, ULB -- Universite Libre de Bruxelles.
- Aghion, Philippe & Dewatripont, Mathias & Rey, Patrick, 1994. "Renegotiation Design with Unverifiable Information," Scholarly Articles 12375014, Harvard University Department of Economics.
- Tai-Yeong Chung, 1991. "Incomplete Contracts, Specific Investments, and Risk Sharing," Review of Economic Studies, Oxford University Press, vol. 58(5), pages 1031-1042.
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