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Liberal Regulation: Privatization of Natural Monopolies with Adverse Selection

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.

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File URL: http://www.socialsciences.manchester.ac.uk/medialibrary/economics/discussionpapers/EDP-0403.pdf
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Paper provided by Economics, The University of Manchester in its series The School of Economics Discussion Paper Series with number 0403.

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Date of creation: 2004
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Handle: RePEc:man:sespap:0403
Contact details of provider: Postal: Manchester M13 9PL
Phone: (0)161 275 4868
Fax: (0)161 275 4812
Web page: http://www.socialsciences.manchester.ac.uk/subjects/economics/

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  1. Jean-Jacques Laffont & Jean Tirole, 1993. "A Theory of Incentives in Procurement and Regulation," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121743, June.
  2. Oliver Hart & Sanford Grossman, 1985. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Working papers 372, Massachusetts Institute of Technology (MIT), Department of Economics.
  3. Dewatripont, M & Maskin, E, 1995. "Credit and Efficiency in Centralized and Decentralized Economies," Review of Economic Studies, Wiley Blackwell, vol. 62(4), pages 541-55, October.
  4. Ilya R. Segal, 1998. "Monopoly and Soft Budget Constraint," RAND Journal of Economics, The RAND Corporation, vol. 29(3), pages 596-609, Autumn.
  5. Schmidt, Klaus M., 1996. "Incomplete contracts and privatization," Munich Reprints in Economics 19776, University of Munich, Department of Economics.
  6. J. Kornai & E. Maskin & G. Roland., 2004. "Understanding the Soft Budget Constraint," VOPROSY ECONOMIKI, N.P. Redaktsiya zhurnala "Voprosy Economiki", vol. 12.
  7. Lewis, Tracy R. & Sappington, David E. M., 1989. "Countervailing incentives in agency problems," Journal of Economic Theory, Elsevier, vol. 49(2), pages 294-313, December.
  8. Jullien, Bruno, 1997. "Participation Constraints in Adverse Selection Models," IDEI Working Papers 67, Institut d'Économie Industrielle (IDEI), Toulouse.
  9. Shleifer, Andrei & Vishny, Robert W, 1994. "Politicians and Firms," The Quarterly Journal of Economics, MIT Press, vol. 109(4), pages 995-1025, November.
  10. Jean-Jacques Laffont & Jean Tirole, 1991. "Privatization and Incentives," Working papers 572, Massachusetts Institute of Technology (MIT), Department of Economics.
  11. Snow, Arthur & Warren, Ronald Jr., 1996. "The marginal welfare cost of public funds: Theory and estimates," Journal of Public Economics, Elsevier, vol. 61(2), pages 289-305, August.
  12. Thomas G. McGuire & Michael H. Riordan, 1991. "Incomplete Information and Optimal Market Structure: Public Purchases from Private Providers," Papers 0010, Boston University - Industry Studies Programme.
  13. Schmidt, Klaus M., 1996. "The costs and benefits of privatization: An incomplete contracts approach," Munich Reprints in Economics 19773, University of Munich, Department of Economics.
  14. Shapiro, C. & Willing, D.R., 1990. "Economic Rationales For The Scope Of Privatization," Papers 41, Princeton, Woodrow Wilson School - Discussion Paper.
  15. Boycko, Maxim & Shleifer, Andrei & Vishny, Robert W, 1996. "A Theory of Privatisation," Economic Journal, Royal Economic Society, vol. 106(435), pages 309-19, March.
  16. Eric S. Maskin, 1999. "Recent Theoretical Work on the Soft Budget Constraint," American Economic Review, American Economic Association, vol. 89(2), pages 421-425, May.
  17. 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.
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