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Alternative Institutional Arrangements in Network Utilities: An Incomplete Contracting Approach

This paper presents a theoretical assessment of the efficiency implications of privatizing natural monopolies which are vertically related to potential competitive industries (network utilities). Based on the incomplete contracts and asymmetric information paradigm, I develop a model that analyzes the relative advantages of different institutional arrangements - alternative ownership and market structures in the industry - in terms of their allocative (static) and productive (dynamic) efficiencies. The main policy conclusion of this paper is that both ownership and the existence of conglomerates in network industries matter. Among other conclusions, this paper provides an economic rationale for mixed economies when the network is public and both vertical separation and full concentration of the industry when the natural monopoly is regulated under private ownership.

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Paper provided by Ilades-Georgetown University, Universidad Alberto Hurtado/School of Economics and Bussines in its series ILADES-Georgetown University Working Papers with number inv116.

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Handle: RePEc:ila:ilades:inv116
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  1. Jean Tirole & Jean-Jaques Laffont, 1985. "Using Cost Observation to Regulate Firms," Working papers 368, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. Bernheim, B Douglas & Whinston, Michael D, 1998. "Incomplete Contracts and Strategic Ambiguity," American Economic Review, American Economic Association, vol. 88(4), pages 902-32, September.
  3. Laffont, Jean-Jacques & Tirole, Jean, 1994. "Access pricing and competition," European Economic Review, Elsevier, vol. 38(9), pages 1673-1710, December.
  4. Mark Armstrong & Simon Cowan & John Vickers, 1994. "Regulatory Reform: Economic Analysis and British Experience," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262510790, June.
  5. Klaus M. Schmidt, 1995. "Incomplete Contracts and Privatization," Discussion Paper Serie A 480, University of Bonn, Germany.
  6. De Fraja, Giovanni, 1991. "Efficiency and Privatisation in Imperfectly Competitive Industries," Journal of Industrial Economics, Wiley Blackwell, vol. 39(3), pages 311-21, March.
  7. Armstrong, M. & Doyle, C. & Vickers, J., 1995. "The access pricing problem: a synthesis," Discussion Paper Series In Economics And Econometrics 9532, Economics Division, School of Social Sciences, University of Southampton.
  8. Vickers, John, 1995. "Competition and Regulation in Vertically Related Markets," Review of Economic Studies, Wiley Blackwell, vol. 62(1), pages 1-17, January.
  9. CREMER, Helmuth & MARCHAND, Maurice & THISSE, Jacques-François, . "The public firm as an instrument for regulating an oligopolistic market," CORE Discussion Papers RP -832, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  10. Schmidt,Klaus M., 1991. "The costs and benefits of privatization," Discussion Paper Serie A 330, University of Bonn, Germany.
  11. Jean-Jacques Laffont & Jean Tirole, 1991. "Privatization and Incentives," Working papers 572, Massachusetts Institute of Technology (MIT), Department of Economics.
  12. Shapiro, C. & Willing, D.R., 1990. "Economic Rationales For The Scope Of Privatization," Papers 41, Princeton, Woodrow Wilson School - Discussion Paper.
  13. John Vickers & George Yarrow, 1988. "Privatization: An Economic Analysis," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262720116, June.
  14. Majumdar, Sumit K., 1998. "Slack in the state-owned enterprise: An evaluation of the impact of soft-budget constraints," International Journal of Industrial Organization, Elsevier, vol. 16(3), pages 377-394, May.
  15. Bernard Caillaud & Patrick Rey & Roger Guesnerie & Jean Tirole, 1987. "Government Intervention in Production and Incentives Theory: A Review of Recent Contributions," Working papers 472, Massachusetts Institute of Technology (MIT), Department of Economics.
  16. Newbery, David M., 1997. "Privatisation and liberalisation of network utilities," European Economic Review, Elsevier, vol. 41(3-5), pages 357-383, April.
  17. Bernheim, B Douglas & Whinston, Michael D, 1986. "Common Agency," Econometrica, Econometric Society, vol. 54(4), pages 923-42, July.
  18. David E. M. Sappington & Joseph E. Stiglitz, 1987. "Privatization, information and incentives," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 6(4), pages 567-585.
  19. Dixit, Avinash & Grossman, Gene M & Helpman, Elhanan, 1997. "Common Agency and Coordination: General Theory and Application to Government Policy Making," Journal of Political Economy, University of Chicago Press, vol. 105(4), pages 752-69, August.
  20. Spiller, Pablo T, 1996. "Institutions and Commitment," Industrial and Corporate Change, Oxford University Press, vol. 5(2), pages 421-52.
  21. Anderlini, Luca & Felli, Leonardo, 1994. "Incomplete Written Contracts: Undescribable States of Nature," The Quarterly Journal of Economics, MIT Press, vol. 109(4), pages 1085-1124, November.
  22. Matsumura, Toshihiro, 1998. "Partial privatization in mixed duopoly," Journal of Public Economics, Elsevier, vol. 70(3), pages 473-483, December.
  23. de Fraja, Giovanni & Delbono, Flavio, 1989. "Alternative Strategies of a Public Enterprise in Oligopoly," Oxford Economic Papers, Oxford University Press, vol. 41(2), pages 302-11, April.
  24. Dekel, Eddie & Lipman, Barton L. & Rustichini, Aldo, 1998. "Recent developments in modeling unforeseen contingencies," European Economic Review, Elsevier, vol. 42(3-5), pages 523-542, May.
  25. Modica, Salvatore & Rustichini, Aldo, 1999. "Unawareness and Partitional Information Structures," Games and Economic Behavior, Elsevier, vol. 27(2), pages 265-298, May.
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