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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 in Public Economics 60, University of Rome La Sapienza, Department of Economics and Law.
    • Handle: RePEc:sap:wpaper:wp60
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    References listed on IDEAS

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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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