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Can regulation increase firm's efficiency?

  • Giuseppe Coco
  • Claudio De Vincenti

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.

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Paper provided by University of Rome La Sapienza, Department of Public Economics in its series Working Papers with number 60.

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Length: 29
Date of creation: Feb 2002
Date of revision:
Handle: RePEc:sap:wpaper:wp60
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  1. Laura Cavallo & Giuseppe Coco, 2002. "La remunerazione del capitale investito nelle imprese soggette a regolazione," ECONOMIA PUBBLICA, FrancoAngeli Editore, vol. 2002(4).
  2. 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.
  3. Gindin, Sam, 1970. " A Model of the Soviet Firm," Economic Change and Restructuring, Springer, vol. 10(3), pages 145-57.
  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. Boitani Andrea & Cambini Carlo, 2002. "Regolazione incentivante per i servizi di trasporto locale," Politica economica - Journal of Economic Policy (PEJEP), Società editrice il Mulino, issue 2, pages 193-226.
  6. Finsinger, Jorg & Vogelsang, Ingo, 1985. "Strategic Management Behavior under Reward Structures in a Planned Economy [Reward Structures in a Planned Economy: The Problem of Incentives and Efficient Allocation of Resources]," The Quarterly Journal of Economics, MIT Press, vol. 100(1), pages 263-69, February.
  7. 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.
  8. Vogelsang, Ingo, 1997. "Introduction," Information Economics and Policy, Elsevier, vol. 9(2), pages 97-102, June.
  9. 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.
  10. Cowan, Simon, 1997. "Price-Cap Regulation and Inefficiency in Relative Pricing," Journal of Regulatory Economics, Springer, vol. 12(1), pages 53-70, July.
  11. 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).
  12. 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.
  13. Armstrong, Mark & Vickers, John, 2000. "Multiproduct Price Regulation under Asymmetric Information," Journal of Industrial Economics, Wiley Blackwell, vol. 48(2), pages 137-60, June.
  14. 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.
  15. Armstrong, Mark & Sappington, David E.M., 2007. "Recent Developments in the Theory of Regulation," Handbook of Industrial Organization, Elsevier.
  16. 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.
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