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Liberal regulation : privatization of natural monopolies with adverse selection

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  • AURIOL, Emmanuelle
  • PICARD, Pierre

Abstract

This paper studies the effect of soft-budget constraints in a pure adverse selection model of monopoly regulation. We consider a government maximizing total surplus but incurring some cost of public funds A la Laffont Tirole (1993). We propose a regulatory set-up in which firms are free to enter natural monopoly markets and to choose their price and output levels as in the laisser-faire. In addition, the government proposes ex-post contracts to the private firms. We show that this regulatory set-up allows governments to avoid re-funding moneyloosing firms and that welfare is larger than under traditional regulationwhere governments commits to both investment and operation cash-flows.

Suggested Citation

  • AURIOL, Emmanuelle & PICARD, Pierre, 2004. "Liberal regulation : privatization of natural monopolies with adverse selection," LIDAM Discussion Papers CORE 2004013, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    • Handle: RePEc:cor:louvco:2004013
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    More about this item

    Keywords

    privatization; soft-budget contraint; adverse selection; regulation; natural monopolies;
    All these keywords.

    JEL classification:

    • L43 - Industrial Organization - - Antitrust Issues and Policies - - - Legal Monopolies and Regulation or Deregulation
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L33 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Comparison of Public and Private Enterprise and Nonprofit Institutions; Privatization; Contracting Out

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