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Can regulation increase firm's efficiency?

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Listed:
  • Giuseppe Coco
  • Claudio De Vincenti

Abstract

This paper examines the possibility that regulation actually increases a monopolist’s cost-efficiency. When the firm’s cost-reducing effort depends on the output supplied, a binding price-cap, by compelling the monopolist to produce more, finally results in lower costs. On the basis of a two-period asymmetric information model with a repeated choice of effort, the paper demonstrates that regulation increases efficiency when the elasticity of demand is sufficiently low, even assuming very conservative preferences and a very poor information set for the regulator. Moreover, contrary to previous findings and conventional wisdom, we find that a periodical rate base review exerts also a positive effect on future cost-reducing effort countervailing the well known ratchet effect.

Suggested Citation

  • Giuseppe Coco & Claudio De Vincenti, 2002. "Can regulation increase firm's efficiency?," Working Papers 60, University of Rome La Sapienza, Department of Public Economics.
  • Handle: RePEc:sap:wpaper:wp60
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    References listed on IDEAS

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    1. Jörg Finsinger & Ingo Vogelsang, 1985. "Strategic Management Behavior Under Reward Structures in a Planned Economy," The Quarterly Journal of Economics, Oxford University Press, vol. 100(1), pages 263-269.
    2. Sappington, David E M & Sibley, David S, 1988. "Regulating without Cost Information: The Incremental Surplus Subsidy Scheme," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 29(2), pages 297-306, May.
    3. Cowan, Simon, 1997. "Price-Cap Regulation and Inefficiency in Relative Pricing," Journal of Regulatory Economics, Springer, vol. 12(1), pages 53-70, July.
    4. Paolo Bertoletti, 2002. "Why Regulate Prices? Some Notes on the Price Cap Methods," Rivista di Politica Economica, SIPI Spa, vol. 92(2), pages 13-30, March-Apr.
    5. Andrea Boitani & Carlo Cambini, 2002. "Regolazione incentivante per i servizi di trasporto locale," Politica economica, Società editrice il Mulino, issue 2, pages 193-226.
    6. Laura Cavallo & Giuseppe Coco, 2002. "La remunerazione del capitale investito nelle imprese soggette a regolazione," ECONOMIA PUBBLICA, FrancoAngeli Editore, vol. 2002(4).
    7. Armstrong, Mark & Vickers, John, 2000. "Multiproduct Price Regulation under Asymmetric Information," Journal of Industrial Economics, Wiley Blackwell, vol. 48(2), pages 137-160, June.
    8. Crew, Michael A & Kleindorfer, Paul R, 2002. "Regulatory Economics: Twenty Years of Progress?," Journal of Regulatory Economics, Springer, vol. 21(1), pages 5-22, January.
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    10. Mark Armstrong & John Vickers, 1991. "Welfare Effects of Price Discrimination by a Regulated Monopolist," RAND Journal of Economics, The RAND Corporation, vol. 22(4), pages 571-581, Winter.
    11. Armstrong, Mark & Sappington, David E.M., 2007. "Recent Developments in the Theory of Regulation," Handbook of Industrial Organization, Elsevier.
    12. Tracy R. Lewis & Huseyin Yildirim, 2002. "Learning by Doing and Dynamic Regulation," RAND Journal of Economics, The RAND Corporation, vol. 33(1), pages 22-36, Spring.
    13. Claudio De Vincenti, 2002. "Non solo energia e telecomunicazioni: i problemi della transizione avviata nella regolazione delle altre utilities," ECONOMIA PUBBLICA, FrancoAngeli Editore, vol. 2002(4).
    14. 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, January.
    15. Vogelsang, Ingo, 1997. "Introduction," Information Economics and Policy, Elsevier, vol. 9(2), pages 97-102, June.
    16. Bradley, Ian & Price, Catherine, 1988. "The Economic Regulation of Private Industries by Price Constraints," Journal of Industrial Economics, Wiley Blackwell, vol. 37(1), pages 99-106, September.
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    More about this item

    Keywords

    Price-cap; regulatory lag.;

    JEL classification:

    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly

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