economic deregulation days of reckoning for microeconomists economic deregulation of american industry is one of the most important experiments in economic policy of our time 1 in 1977 17 percent of u s gnp was produced by fully regulated industries 2 by 1988 following ten years of partial and complete economic deregulation of large parts of the transportation communications energy and financial industries that total had been cut significantly to 6 6 percent of gnp 3 the political forces behind the decision to change the market conditions under which roughly 600 billion of u s output is produced were strong and varied but according to political scientists martha derthick and paul quirk 1985 p 36 deregulation would never have occurred if economists especially microeconomists had not generally supported it through their research 4 in retrospect it is fair to ask were microeconomists able to develop a theoretical and empirical framework to explain regulation and its effects and to form predictions of deregulation s effects were they able to predict the actual effects of deregulation this paper surveys the evidence to address these questions and of

tripartite income employment contracts and coalition incentive compatibility tripartite contracts between workers a firm and an insurance broker pareto dominate the usual bilateral arrangements if coalitions are not feasible they do this by allowing the broker to run surpluses over a reservation expected utility in some states and deficits in others we show that these contracts are manipulable by coalitions this motivates our main contribution the definition and characterization of coalition incentive compatible tripartite contracts we then ask whether broker intermediation can still be useful the answer is that not every coalition incentive compatibility requirement annuls the critical budget breaking property specifically if firm broker coalitions are feasible there is no three party contract that is coalition incentive compatible and pareto superior to bilateral firm worker contracts except in the extreme case where the workers demand for leisure is income inelastic but if only a firm worker coalition can form the addition of a broker to a bilateral arrangement does reduce the welfare losses caused by the existence of asymmetric information

state versus federal environmental regulation in a non cooperative monopoly screening model abstract a multiple principal monopoly screening model is presented in which two regulators act as rivals when setting a menu of contracts composed of a two part pricing scheme and design standard state and federal environmental regulation are modeled we show that the firm prefers federal environmental regulation because the design standards are more stringent this preference for stricter control occurs because higher standards generate higher information rents for the firm

what drives deregulation economics and politics of the relaxation of bank branching restrictions this paper investigates private interest public interest and political institutional theories of regulatory change to analyze state level deregulation of bank branching restrictions using a hazard model we find that interest group factors related to the relative strength of potential winners large banks and small bank dependent firms and losers small banks and the rival insurance firms can explain the timing of branching deregulation across states during the last quarter century the same factors also explain congressional voting on interstate branching deregulation while we find some support for each theory the private interest approach provides the most compelling overall explanation of our results

welfare loss redistribution effect and restriction of output due to monopoly in banking abstract although several studies have estimated the welfare loss due to monopoly for manufacturing no such estimate has been made for banking this study seeks to fill that gap by estimating the deadweight welfare loss the redistribution effect total monopoly profits and restriction of output due to monopoly in banking for 1978 the analysis is based on 6 500 banks and over 2 000 markets results indicate that the deadweight welfare loss in banking is very small however the redistribution effect total monopoly profits and restriction of output in banking is quite large

earnings rents and competition in the airline labor market transformation of the airline labor market continues long after deregulation airline wages changed little immediately following deregulation implying either the absence of regulatory rents or maintenance of product market power and union strength analysis for 1973 1997 however indicates that prior to recent gains the relative earnings of air transport workers decreased markedly during the latter half of the 1980s and early 1990s some of the earnings advantage of airline workers represents returns to occupational skills and worker specific quality labor rents are attributable largely to union bargaining power which in turn is constrained by the financial health of carriers

policy spillovers in the regulation of multiple pollutants abstract we analyze the interplay between policies aimed to control transboundary and local pollutants such as greenhouse gases and particulate matter the two types of pollution interact in the abatement cost function of the polluting firms through economies or diseconomies of scope they are regulated by distinct entities potentially with different instruments that are designed according to some specific agenda we show that the choice of regulatory instrument and the timing of the regulations matter for efficiency emissions of the local pollutant are distorted if the regulators anticipate that transboundary pollution will later be regulated through emission caps the regulation is too stringent with diseconomies of scope and not enough with economies of scope in contrast we obtain efficiency if the transboundary pollutant is regulated by emission taxes or tradable emission permits provided that the revenue from taxing emissions are redistributed to the countries in a lump sum way and that the initial allocation of tradable emission permits is not linked to abatement costs

privatization deregulation and capital accumulation author affiliation gerhard glomm department of economics indiana university wylie hall room 105 bloomington in 47405 usa gglomm indiana edufabio mendez department of economics walton college of business room 402 university of arkansas fayetteville ar 72701 usa fmendez uark edu corresponding author acknowledgment we are grateful to b ravikumar rowena pecchenino jeffrey wooldridge felix rioja stefan krause and seminar participants from the economics department at emory university for useful observations we are also grateful to cristian opazo and javier reyes for their assistance and to the editor and two anonymous referees for helpful comments 1 introductionsince the early 1980s many countries have privatized and deregulated intermediate goods industries such as gas electricity or telecommunications that had traditionally been run by public monopolies the european union eu for example has adopted aggressive policies toward the elimination of monopolies in the telecommunication market and conducted a general privatization program whose sales receipts amounted to more than 3 of gdp between 1985 and 1995 constantinou and lagoudakis 1996 parker 1998 in other regions of the world countries like australia chile brazil argentina and the united states have implemented similar policies vickers and yarrow 1991 winston 1993 van der vlies 1996 while there is a large literature studying the microeconomic effects of privatization and deregulation the long run macroeconomic effects of such types of reforms have been subject to relatively less scrutiny in this paper we use a model of capital accumulation in order to investigate the long run effects of privatization and deregulation this paper complements a small literature that includes parente and prescott 1999 2000 schmitz 2001 and herrendorf and teixeira 2004 parente and prescott 1999 2000 and herrendorf and teixeira 2004 study the impact of monopoly rights on long run levels of income and find that the effect is large the latter authors find for example that monopoly rights can reduce aggregate income in the long run by a factor of seven schmitz 2001 uses a two sector model to calculate the impact of government production of investment goods on long run levels of labor productivity he finds that government production can lower labor productivity levels in the long run by about 30 our approach differs from herrendorf and teixeira 2004 who infer the extent of monopoly power from differentials in the relative prices of nontradeables instead we take the approach that monopoly power is likely to arise and exist in the public production of intermediate goods such as public utilities or telecommunication and that the size of these sectors relative to the rest of the economy can be directly estimated see world bank 1995 our approach also differs from schmitz 2001 in a fundamental way because he abstracts completely from the issue of monopoly rights in his model the only difference between the public and private production is that the government is endowed with a less productive technology than the private sector the long run income gains from privatization and deregulation in our paper are similar in magnitude to those found in schmitz 2001 in our base case calculation the long run income gain of changing from a public sector monopoly to a competitive market with private firms is 18 these welfare gains can be larger when there has been relatively low governmental investment in the public sector capital and when the elasticity of substitution between the intermediate input and physical capital is small like schmitz 2001 we view our results as less pertinent for rich economies like the united states where public sector involvement in intermediate good production is relatively small rather we view the results of our model as being applicable mostly to least developed countries ldcs such as egypt where governments typically play a large role in intermediate goods production

research on the motion picture industry state of the art and new directions off the beaten track away from theatrical release the motion picture industry has been subject of extensive academic research over the last decades however most scholars focused on the u s theatrical motion picture market the number of research activities regarding even more profitable release windows such as home video or television has been substantially lower although international distribution is essential for a motion picture project to break even there has been little significant re search on most other markets this paper aims at summarizing the current state of research on the motion picture industry particularly from marketing and management perspective revealing research gaps and proposing recommendations for future research endeavors therefore a three pillar scheme is developed to systemize previous findings research on intraorganizational decision making contractual relationships between national stakeholders and international market competition are differentiated since these insights are mainly derived from u s theatrical exhibition they can hardly be applied to other markets and exhibition windows thus potential research areas are identified to expand knowledge of posttheatrical and international markets

on governing multilateral transactions with bilateral contracts bilateral contracts while neither negotiated nor enforced in an integrated way are nevertheless often interrelated both economically and strategically owing to production or consumption complementarities and to asymmetric information a set of bilateral contracts forms a mechanism with special properties this mechanism forms a contract equilibrium if there is no joint incentive for a supplier and any individual customer unilaterally to alter the terms of their contract if agents preferences are risk neutral in money income and if their private information is independent then there exists a contract equilibrium that implements efficient transactions if in addition preferences are strictly concave and differentiable in goods and services and technologically feasible sets are suitably convex then this equilibrium is essentially unique

incentives for environmental protection this book explores the extent to which pricing incentives such as charges on emissions in contrast to regulatory standards can be shaped into a practical policy that is technically effective politically enactable administratively enforceable and equitable it also compares he advantages and disadvantages of this approach to those that characterize the policy of compliance to regulatory standards and it identifies the criteria on which either pricing mechanisms or regulatory standards should be based three case studies comprise the heart of the book one investigates carcinogenic chemical emissions another audits the tradeoffs in controlling aircraft noise near major airports and the third treats the protection of air quality from pollution by primarily stationary sources the case studies are introduced by a chapter that gives numerous examples of possible pricing approaches and identifies common lessons that the three diverse studies reinforce the studies are followed by a chapter which is based on interviews with congressional staff environmentalists and industrial lobbyists and other interest groups in washington revealing their assessments of pricing mechanisms in environmental protection thomas c schelling and his co authors david harrison jr albert l nichols robert repetto and steven j kelman are all affiliated with the kennedy school of government harvard university the book is fifth in the series regulation of economic activity

an agenda for the design and study of international environmental agreements abstract the combination of a general greening of international political debate and the events of 1992 at the rio earth summit have led to great interest in the question of global environmental protection while it is recognized that international environmental agreements ieas are the means by which the earth s fragile environment is most likely to be protected this recognition has been recent hence there is very little formal research on the design and study of ieas as such in this paper i propose and describe a research agenda for the design and study of ieas very generally i propose that we frame the iea design question as a problem in mechanism design we will then be able to use inter alia the theory of common agency and the theory of hierarchies to generate interesting new theoretical and practical insights into the workings of ieas

incentives in principal agent relationships this article identifies some of the major issues that have been examined in the literature on incentives the article begins by discussing the frictions that lie at the heart of incentive problems next the principal s optimal response to these frictions is explored taking as given the characteristics of the agents with whom the principal interacts in a nonrepeated setting the design of individualized contracts contests and tournaments is analyzed then the principal s task of selecting the best agent is addressed and repeated agency relationships are considered

privatization in latin america what does the evidence say privatization is under attack criticisms run from corrupt deals to abuse of market power and social welfare losses we evaluate the empirical record on privatization relying on recent comprehensive studies from latin america the paper presents four main results first the increased profitability of privatized firms is not explained by sample selection biases second in the quest to identify the sources of increased profitability after privatization we find little evidence that validates concerns of generalized market power abuses exploitation of workers and lack of fiscal benefits third the manner in which privatization is carried out matters transparency and homogeneity in procedures speed and limited restructuring prior to privatization lead to better outcomes and less room for corruption and discretion finally privatization s success is enhanced by two complementary policies deregulation or reregulation of industries previously shielded from competitive forces and an effective corporate governance framework that facilitates privatized firms access to capital at lower cost overall the empirical record shows that privatization leads to increased profitability and productivity firm restructuring fiscal benefits output growth and even quality improvements most cases of privatization failure can be linked to poor contract design opaque processes with heavy state involvement lack of reregulation and a poor corporate governance framework

decentralization hierarchies and incentives a mechanism design perspective separation of ownership from management multidivisional firm organizations delegation of production decisions to worker teams delegation of pricing and advertising decisions to retail franchisers reliance on intermediaries in trade or finance and distribution of regulatory authority across different agencies represent examples of organizations that delegate and distribute decision making authority instead of centralizing it this paper reviews literature on costs and benefits of delegated decision making in hierarchical organizations or contracting networks with regard to problems of incentives and coordination it starts by describing incentive and coordination costs of delegation in simple canonical examples of hierarchies where both information and incentives of different decisionmakers differ one class of models pertain to contexts where the classical revelation principle applies i e where costs of contractual complexity information processing or communication are absent agents do not collude and the mechanism designer can commit to the mechanism delegation may conceivably entail a loss of control and coordination arising from the divergence of information and incentives sufficient and necessary conditions for this loss to be mitigated entirely include risk neutrality top down contracting and monitoring of transfers or production assignments between subordinates the next class of models introduces communication costs that restrict the performance of centralized arrangements relative to delegation owing to a resulting loss of flexibility which has to be traded off against possible control losses of delegation finally consequences of collusion among agents is discussed which typically enlarge the range of circumstances under which delegation can attain optimal second best outcomes the paper concludes with a discussion of the relevance of this theoretical literature to recently emerging empirical studies of industrial organizations where delegated decision making plays an important role adoption of innovative human resource management practices new information technologies and retail franchising

market specific effects of rail deregulation since partial deregulation of the railroad industry in 1980 real rail rates have fallen yet previous studies are inconclusive in identifying deregulation as the reason for lower rates in this paper the author develops a model that tests a variety of deregulation effects on the rates charged for transporting thirty four different commodities the results suggest that deregulation has significantly affected almost all commodities and that the effects vary by commodity and through time initially deregulation increased rates for some commodities had no effect on others and decreased rates on still others however by 1988 deregulation lowered rates significantly for almost all commodities copyright 1994 by blackwell publishing ltd

incentive compatible regulation of a foreign owned subsidiary abstract transfer prices are administered charges for intra firm transfers of factors of production for a multinational firm transfer prices for international transfers provide the means to redistribute costs and increase global profits given variations in national tax and profit repatriation policies local regulation of a subsidiary may thus be necessary to limit the welfare costs of strategic transfer pricing prusa journal of international economics 1990 28 155 172 characterizes the welfare maximizing regulations for a monopoly subsidiary that induce the firm to report transfer prices truthfully we show however that it can be more efficient to implement regulations that encourage the firm to misrepresent its true transfer costs

regulation of prices and pollution under incomplete information abstract regulation of prices and pollution for a monopolist with private information is considered with a focus on the relative efficiency of standard setting and emissions taxation approaches to pollution control with incomplete information emissions taxation is a dominated regulatory instrument for abatement purposes because it generates information costs that can be avoided when an abatement standard and prices are set by the regulator an emissions tax has value however as a means of reducing those information costs but its use for this purpose may increase pollution

separation of regulators against collusive behavior we show that the separation of powers in regulation may act as a commitment against the threat of regulatory capture splitting regulatory tasks and monitoring technologies among several nonbenevolent regulators may reduce their discretion in engaging in socially wasteful activities when regulators make collusive offers that are accepted by the agent whatever his characteristics competition between regulators relaxes collusion proofness constraints and improves social welfare this result is robust to different specifications of the agent s preferences and to the timing of the game as long as one insists on safe side contracting offers we also discuss how separation affects both allocative efficiency and the distribution of rents in the economy

comparative statics of a monopolistic firm facing price cap and command and control environmental regulations abstract an exhaustive comparative statics analysis of a model of a monopolistic firm facing price cap regulation and a variety of commonly implemented command and control environmental regulations is carried out the comparative statics are intrinsic to each of the models and thus form their basic empirically testable properties several unanticipated results emerge from the analysis in particular it is shown that a subset of the intrinsic comparative statics are qualitatively invariant to all of the commonly employed command and control environmental regulations that a price cap regulated profit maximizing monopoly might face while others are specific to the type of command and control environmental regulation in place

aviation policy past and present for 25 years airline deregulation has been a symbol of the trend toward less expansive government the move from economic regulation to deregulation has delivered on its efficiency promises and there have been significant benefits to consumers in terms of lower prices and more convenient schedules however airline competition especially at hub airports remains imperfect the nature of these imperfections is explained better by models of oligopolistic behavior than by the contestability theory paradoxically for this industry the terrorist attack of september 11 2001 has ushered in an expanded role of government in aviation policy this expanded role does not reinstate government intervention in airline economic decisions rather it provides financial stabilization of the industry in the short run and long term structural change in aviation security

separability test for the electricity supply industry this paper examines the vertical integration issue of the electricity industry this industry is typically vertically integrated and heavily regulated the paper investigates the potential technological efficiency loss due to the vertical disintegration using the translog production function three separability hypotheses using the allen uzawa elasticity of substitution are tested to examine the feasibility of various degrees of disintegration of the current industry structure all three separability hypotheses are rejected and the cost of disintegration is estimated further estimates indicate that the electricity industry appears to have exhausted economies of scale unlike other deregulated industries disintegration of the electricity industry will entail technological efficiency loss

applied welfare economics with discrete choice models economists have been paying increasing attention to the study of situations in which consumers face a discrete rather than a continuous set of choices such models are potentially very important in evaluating the impact of government programs upon consumer welfare but very little has been said in general regarding the tools of applied welfare economics indiscrete choice situations this paper shows how the conventional methods of applied welfare economics can be modified to handle such cases it focuses on the computation of the excess burden of taxation and the evaluation of quality change the results are applied to stochastic utility models including the popular cases of probit and logit analysis throughout the emphasis is on providing rigorous guidelines for carrying out applied work this abstract was borrowed from another version of this item

winners and losers from the privatization and regulation of utilities lessons from a general equilibrium model of argentina a computable general equilibrium cqe model is used to estimate the macroeconomic and distributional effects of the privatization and regulation of utilities in argentina begun in 1989 based on data available after the privatization that indicate different kinds of efficiency gains in electricity gas water and telecommunications both the privatization and effective regulation are estimated to yield significant macroeconomic benefits gains from the privatization accrue mainly to high income classes while gains from the effective regulation of newly privatized utilities accrue mainly to low income classes computable general equilibrium cge estimates of overall employment effects suggest that privatization was not a major contributor to the dramatic rise in unemployment in argentina between 1993 and 1995 this rise was more likely due to the tequila effect of an interest rate shock

optimizing information in the herd guinea pigs profits and welfare abstract herding arises when an agent s private information is swamped by public information in what m o jackson and e kalai 1997 games econ behavior 21 102 134 call a recurring game the agent will fail to reveal his own information and will follow the actions of his predecessor and as a result useful information is lost which might have highlighted a better choice for later decision makers this paper evaluates the strategy of forcing a subset of agents to make their decision early from the perspective of a social planner and a firm with a valuable or valueless product promotional activity by firms can be explained as an attempt to overcome the herd externality and maximize sales journal of economic literature classification numbers d82 d83 l15 m30

the value of public information in monopoly the logic of the linkage principle of milgrom and weber 1982 extends to price discrimination a non linear pricing monopolist who sells to a single buyer always prefers to commit to publicly reveal information a liated to the valuation of the buyer

experimentation in markets we present a model of entry and exit with bayesian learning and price competition a new product of initially unknown quality is introduced in the market and purchases of the product yield information on its true quality we assume that the performance of the new product is publicly observable as agents learn from the experiments of others informational externalities arise we determine the markov perfect equilibrium prices and allocations in a single market the combination of the informational externalities among the buyers and the strategic pricing by the sellers results in excessive experimentation if the new product is launched in many distinct markets the path of sales converges to the efficient path in the limit as the number of markets grows in multi agent learning situations informational externalities may reduce the number of experiments undertaken below the socially efficient level as buyers choose among new experience goods or firms decide whether to adopt a new technology the availability of information from others decisions gives rise to a free rider problem rather than perform a costly experiment herself a buyer may opt to wait and see how the market evaluates the new product in this paper we develop a simple market model of experimentation and analyse the informational effects in a model with buyers and sellers in contrast to the one sided experimentation problems we find that equilibrium experimentation often exceeds the pareto optimal level in two sided models the first model we consider is a dynamic duopoly in continuous time with homogeneous buyers two firms with differentiated products engage in price competition over time one product has a known value while the other is new and its true value is initially uncertain to all the parties in the model the value of the product is determined by the quality of the match between consumer preferences and product characteristics additional information is acquired only through repeat purchases in each period buyers observe a noisy signal of the true value of the product we assume that all signals are publicly observable and that all uncertainty is about a common value component with this assumption all buyers and sellers condition their behaviour on the same information and we can abstract from individual differences in past observations this is justified in economic situations where public data on other buyers choices is available and informative for example when choosing among providers of communication or transportation services such as mail delivery firms or airlines it is reasonable to rely on consumer reports and other published data in addition to one s private experience we also show that our model has an alternative interpretation as one where a flow of buyers make a once and

infrastructure development and regulatory reform in sub saharan africa the case of air transport this technical paper analyses the main policy issues raised by regulatory reform in air transport in sub saharan africa its basic premise is that improving air infrastructure is of paramount importance for the region as it tries to integrate more thoroughly into the world economy on the basis of the experience of oecd countries with privatisation liberalisation and regulatory design the author analyses progress being made in sub saharan africa and identifies three important case studies the restructuring of the regional airline of francophone western africa the sell off of the state owned airline of kenya and the overall reform process in south africa by far the largest market in the sub continent the analysis highlights the importance of regional dynamics in the upgrading of the air transport industry in developing and emerging areas sub saharan africa has made smaller progress in this respect than for instance central america as the start of the millenium round and ce document analyse les principales questions de politique economique soulevees par la reforme de la reglementation du transport aerien en afrique subsaharienne il montre que l amelioration de l infrastructure du transport aerien constitue un enjeu fondamental dans les efforts de la region pour s integrer devantage dans l economie mondiale sur la base des experiences des pays de l ocde dans les domaines de la privatisation de la liberalisation et de la reglementation l auteur analyse les progres realises en afrique subsaharienne et identifie trois etudes de cas particulierement importantes la restructuration de la compagnie aerienne regionale de l afrique de l ouest francophone la vente de la compagnie aerienne publique du kenya et le processus plus general de reformes en afrique du sud de loin le plus grand marche du continent l analyse met en lumiere l importance des dynamiques regionales pour renforcer l industrie du transport aerien dans les pays emergents et en

noncooperative regulation of a nonlocalized externality with a nonlocalized pollution externality different groups bear the costs and benefits of abatement in the case of acid rain these groups are respectively consumers in the midwest and pollutees in the northeast these groups have conflicting interests that are represented respectively by a public utilities commission and an environmental regulator we analyze a model in which the environmental protection agency acting as a von stackelberg leader regulates pollution and the public utility commission regulates the price for a monopolist that has private information about the effectiveness of its abatement alternatives we characterize a noncooperative equilibrium and compare it with a cooperative equilibrium a nonlocalized pollution externality poses special regulatory problems when the benefits and the costs of abatement are borne by distinct groups whose interests are represented by different regulatory agencies a relevant example is acid rain which is believed to be caused in part by coal fired electricity generating plants these emit sulfur dioxide and nitrogen oxide which upon contact with moisture in the atmosphere form acid that falls with rain measures to reduce these emissions are of concern to the residents of the states in which the coal fired generating plants are located because abatement costs increase the prices they pay for electricity a number of plans have been proposed for distributing those costs more broadly but the costs of reducing the emissions of generating plants located in ohio will likely be borne in large part by ohio consumers and utilities while the benefits from abatement will largely be realized by the residents of the northeast and canada the control of a nonlocalized externality such as acid rain raises the issue of the relationship between the environmental regulator the environmental protection agency epa and the public utility commission the former is responsible for achieving an acceptable balance between the damage from pollution and the cost of abatement the latter is responsible for pricing electricity on the basis of the costs of production and pollution control one possibility is that cooperation between the two regulators leads to the joint regulation of emissions and prices cooperation would internalize the conflicting interests and mandates of the regulators but the distributive consequences of the regulatory alternatives inhibit cooperation the public utility commission for example has an interest in avoiding abate

the economics and politics of regulation this article provides a critical survey of the literature on the economics and politics of regulation after some conceptual clarifications the article surveys the evolution of perspectives on regulation during the post second world war period emphasizing especially the interactions between intellectual changes and real world economic and political developments it then looks at some themes that are neglected in the current literature the inevitability of regulation the need to create and not simply regulate markets distributional issues dynamic considerations and the politics of regulation and suggests that incorporating these themes more closely into the discussion will improve our understanding in this area copyright 1997 by oxford university press

verifiable and non verifiable anonymous mechanisms for regulating a polluting monopolist abstract optimal regulation of a polluting natural monopolist must correct for both external damages and market power to achieve a social optimum existing non bayesian regulatory methods require knowledge of the demand function while bayesian schemes require knowledge of the underlying cost distribution we introduce mechanisms adapted to use less information our p rice based s ubsidy ps mechanisms give the firm a transfer that matches or approximates the incremental surplus generated each period the regulator need not observe the abatement activity or know the demand cost or damage functions of the firm all of the mechanisms induce the firm to price at marginal social cost either immediately or asymptotically

reimbursing health plans and health providers efficiency in production versus selection the tradeoff between an insurer s or medical provider s incentives to select good risks and to produce efficiently is governed by the supply price analog to the demand price tradeoff between moral hazard and risk aversion under a variety of models the optimum supply price is a mixture of capitation and fee for service payments empirical literature shows that pure capitation payment leaves strong incentives for selection that are acted upon the presence of contracting costs in a rothschild stiglitz model means a limited pooling equilibrium can exist and that poor risks will not be at their preferred outcome

in pursuit of monopoly power recent quantitative work in industrial economics this paper reviews empirical work in industrial organization devoted to the question of inferring the existence of monopoly power from data on observed market outcomes like profits and prices the discussion covers inter industry work long conventional in the area newer developments in intra industry analysis and case studies and concludes with some remarks on a small but growing body of work assessing market dynamics the wide range of studies reviewed all generally reveal that market power exists in many industries

supplying information to facilitate price discrimination the authors examine the incentive of a seller to allow potential buyers to acquire private information about their tastes for the seller s product improved private information for buyers enables the seller to segment the market and charge higher prices to high value buyers however improved information can also provide rents to buyers in a variety of settings this tradeoff is optimally resolved at one of two extremes either buyers are supplied with the best available knowledge of their tastes or no information is supplied by the seller copyright 1994 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

the influence of the economic approaches to regulation on banking regulations a short history of banking regulations this article highlights the theoretical foundations of the regulations at work in the banking sector and examines their responsibility in the onset of the 2007 2008 financial crisis drawing a parallel between the main changes in banking regulations since the 1960s and the evolutions in the economic analyses of regulation over the same period it shows that the shift from the public interest theory of regulation that prevailed until the late 1960s towards the private interest theory of regulation accounts for the substitution of micro prudential regulations for macro prudential ones and explains a paradigmatic change in the conception of the regulatory instruments of the banking authorities it also shows that although the outcome of several factors the 2007 2008 crisis was also a consequence of the fact that the economic analysis of banking regulations supported micro prudential regulations that fail to take the global features and impact of banking activities into account and have proved unable to recommend effective solutions in a context of crisis

why market shares matter an information based theory consider a duopoly market in which consumers have heterogeneous information about the quality differential q of the two goods when firms are ignorant about q consumers rationally believe that a firm with high market shares is likely to produce a high quality good as a result firms try to signal jam the inferences of consumers and compete for market shares beyond the level explained by short run profit maximization when firms know q multiple equilibria may exist but there is always one equilibrium in which market shares signal quality and then the market tends to be more competitive

winners and losers from the privatization and regulation of utilities a computable general equilibrium cqe model is used to estimate the macroeconomic and distributional effects of the privatization and regulation of utilities in argentina begun in 1989 based on data available after the privatization that indicate different kinds of efficiency gains in electricity gas water and telecommunications both the privatization and effective regulation are estimated to yield significant macroeconomic benefits gains from the privatization accrue mainly to high income classes while gains from the effective regulation of newly privatized utilities accrue mainly to lowincome classes cge estimates of overall employment effects suggest that privatization was not a major contributor to the dramatic rise in unemployment in argentina between 1993 and 1995 this rise was more likely due to the tequila effect of an interest rate shock

market opening regulation and growth in europe deregulation a political economy analysis lack of urgency explains why continental europe trails in the deregulation process yet there are lessons to be learnt from deregulation elsewhere this paper reviews the situation and focuses on the political preconditions for successful deregulation it finds a clear negative relationship between regulation and economic performance it characterizes european countries by the degree of regulation of labour and product markets and finds that the latter seems to be more important for economic performance finally it notes the importance of a proper management of the deregulation effort which may include some re regulation deregulation is more likely to succeed the more transparent the economic benefits and the more clearly stated the objectives and the time schedule kees koedijk and jeroen kremers

regulation and investment use newly assembled data on regulation in several sectors of many oecd countries to provide evidence that regulatory reform of product markets is associated with an increase in investment a component of reform that plays a very important role is entry liberalization but privatization also has a substantial effect on investment sensitivity analysis suggests that our results are robust jel e22 l5

facilities competition and local network investment theory evidence and policy implications a new approach has emerged in the u s and elsewhere in the world for promoting investment in local communications networks competition especially facilitiesbased entry has become a principal means to encourage the efficient amount and timing of investment in local exchange infrastructure and adoption of advanced technologies despite the popularity of open entry policies the logic underlying these policies has never been worked through nevertheless we find preliminary and incidental studies that support the claim that facilities based entry stimulates investment by both incumbents and entrants the message for policy makers is first to remove artificial restrictions on facilities based entry and on incumbent investment both as a response to competition and in advance of entry and second to take account of the possibility of a virtuous cycle of investment deriving from incumbent entrant interaction these measures promise to supplement the ordinary benefits of facilities competition that will aid in building the next generation advanced communications network

price and quality in a new product monopoly in a signal extraction model of consumer behaviour higher prices signal higher quality products for a new product monopoly even without cost asymmetries across different qualities moreover higher quality products earn greater expected profits and the monopolist has an incentive to provide even transient improvements in quality finally the monopolist has a positive incentive to conduct market research about quality and produces more information than is socially optimal

strategic waiting for consumer generated quality information dynamic pricing of new experience goods in this paper we study the impact of consumer generated quality information e g consumer reviews on a firm s dynamic pricing strategy in the presence of strategic consumers such information is useful not only to the consumers that have not yet purchased the product but also to the firm the informativeness of the consumer generated quality information depends however on the volume of consumers who share their opinions and thus depends on the initial sales volume hence via its initial price the firm not only influences its revenue but also controls the quality information flow over time the firm may either enhance or dampen the quality information flow via increasing or decreasing initial sales the corresponding pricing strategy to steer the quality information flow is not always intuitive compared to the case without consumer generated quality information the firm may reduce the initial sales and lower the initial price interestingly the firm may get strictly worse off due to the consu

labour inputs substitution during corporate restructuring a translog model approach for us freight railroads after deregulation in 1980 competitive pressures forced the large us freight railroads to reduce costs and restructure resulting in an economic renaissance of the us railroad companies after years of poor financial conditions the most striking restructuring measure receiving much attention was dramatic labour downsizing until 2004 employment was reduced by 60 but other overlooked measures are the significant restructuring of workforce composition and important changes in railroads workplace organization practices and corporate culture to better understand this successful occupational restructuring i investigate labour inputs substitutional relationships by using a translog variable cost model labour is decomposed into six employee categories rather than traditional production nonproduction breakdown to estimate inputs elasticities of substitution the data investigated is a unique firm level dataset on the us freight class i railroads covering a 22 year period which allows this fine grained a

regulation asymmetric information and auditing this article analyzes a model of a regulated firm that is better informed about its cost function than is the regulator by auditing at a cost however the regulator is assumed to be able to observe the realized cost of the firm if the regulator finds that the firm had misrepresented its costs at the time at which prices were set he can order a refund to consumers in the optimal policy the regulator audits when the firm reports for pricing purposes that its costs will be high and orders a refund when the auditfinds that realized costs are lower than anticipated given the original report a separation result that obtains for an important case indicates that the initial pricing decision is independent of the auditing decision the auditing decision however depends on the price that was initially set the optimal auditing strategy is characterized and the nature of the welfare gains are identified the methodology used in the analysis involves the characterization of an equilibrium of a revelation game with an ex post observable

coordination and the provision of incentives to a common regulated firm abstract this paper considers the problem faced by two regulators in providing incentives to a common privately informed regulated firm under various degrees of coordination in the model the firm exerts effort toward cost reduction and self dealing and incentives can be input based monitoring and output based demanded cost targets full coordination between the regulators leads to the second best allocation a setting in which the regulators do not fully coordinate leads to i higher overall monitoring more aggressive input based incentives and ii higher demanded cost targets i e more lenience in terms of output based incentives as a consequence of i in all possible equilibria the effort toward cost reduction will be smaller when the agent reports to two regulators who do not coordinate i and ii imply that the impact on the effort toward self dealing activities is ambiguous in our leading example self dealing will be larger if the regulators coordinate on monitoring levels but smaller if they choose monitoring levels independently

railroad deregulation pricing reforms shipper responses and the effects on labor the staggers rail act of 1980 relaxed restrictions on pricing and eased abandonment procedures in the railroad industry although the act made virtually no reference to labor its impact on labor has been dramatic the long term contraction of industry employment accelerated quite sharply after 1980 wages increased until 1985 then declined substantially the authors whose empirical analysis uses data on aggregate rail employment for the years 1963 90 current population survey data for 1973 88 and evidence from collective bargaining agreements for 1971 90 argue that pricing adjustments under the staggers act led to changes in shipper behavior which in turn allowed for large declines in the derived demand for rail labor despite increasing output and the observed pattern of wage change followed from the realization of the act s eventual effects on employment

sequential decisions with tests we consider a principal agent problem where the principal wishes to be endorsed by a sequence of agents but cannot truthfully reveal type in the standard herding model the agents learn from each other s decisions which can lead to cascades on a given decision when later agents private information is swamped we augment the standard model to allow the principal to subject herself to a test designed to provide public information about her type she must decide how tough a test to attempt from a continuum of test types which involves trading off the higher probability of passing an easier test against the greater impact from passing a tougher test we find that the principal will always choose to be tested and will prefer a tough test to a neutral or easy one

reputation and survival learning in a dynamic signalling model we consider the impact of reputation on the survival of a monopolist selling single units in discrete time periods whose quality is learned slowly if the seller learns her own quality at the same rate as customers a sufficiently bad run of luck could induce her to stop selling when she knows her quality a good seller never stops selling though at low reputations a bad seller does with some probability furthermore a seller with positive though imperfect information sells for the same number of periods whether her information is private or public we further consider the robustness of the central result when the seller s opportunities for strategic behaviour are limited

are the crude oil markets becoming weakly efficient over time a test for time varying long range dependence in prices and volatility this paper analyzes the efficiency of crude oil markets brent and west texas intermediate by means of estimating the fractal structure of these time series we test for time varying degrees of long range dependence using the rescaled range hurst analysis and find evidence that this market has become more efficient over time these results are robust for controlling for short term autocorrelation by means of a shuffling procedure

finessing the unintended outcomes of price cap adjustments an electric utility multi product perspective performance based regulation for electric utilities is now a foreseeable future reality in the united states and in many cases some form of a price cap is likely to be its modus operandi viewing electricity in a multi product context a utility that is constrained by a price cap will likely see either its exogenous sales mix change over time within any customer class or different rates of sales growth among its customer classes in either event the unintended and adverse effect may be a change in the utility s average rate level that results in a price cap violation starting from a base year average rate and moving on to the future the traditional rpi x price cap percentage adjustment provides the utility with a new and violation prone price cap we show that the addition of a specific monetary value to that percentage adjustment will negate any possibility of an unintended price cap violation and thus help the utility stay financially sound we also show how to compute that value from data that are readily available to the utility we do this in the spirit of helping regulators worldwide to restructure energy markets along competitive lines so as to enhance consumer welfare in a wider context this price cap formulation is potentially applicable to price cap regulation in other types of industries that have a multi product and or a multiple customer class context

equalizing discrimination and cartel pricing in transport rate regulation there are two possible outcomes of transport regulation 1 maintaining a carrier cartel and 2 imposing equalizing discrimination against advantaged and in favor of disadvantaged shippers both functions have required a complex rate structure to enforce the respective forms of price discrimination using a sample of freight bills from motor carriers and railroads this paper demonstrates that the principal result of motor carrier regulation has been to maintain a cartel of truckers while railroad regulation has thwarted the wishes of the railroad cartel by imposing equalizing discrimination on weak and strong shippers motor carrier rates respond in an economically rational manner to costs and shipper bargaining power rail rates are either unresponsive or perversely responsive to the same factors deregulation should have divergent effects in the two industries

deregulating property casualty insurance pricing the case of workers compensation abstract property and casualty lines of insurance have traditionally been subject to more regulatory price control than most goods in the u s economy however beginning in the 1970s some states began to deregulate these lines of insurance either dropping mandatory pricing in concert by means of rating bureaus or additionally dropping regulatory prior approval of premiums this paper assesses the impact of rate deregulation in workers compensation insurance besides examining the impact of deregulation on price we examine effects on injury rates as rate regulation may have reduced incentives for workplace safety by restricting price differences across risk classes we find that eliminating both rating bureau pricing and prior approval reduced long run premiums by 13 7 percent and reduced injury rates at most by 8 2 percent in contrast eliminating only rating bureau pricing had small effects

market diffusion with two sided learning we analyze the diffusion of a new product of uncertain value in a duopolistic market both sides of the market buyers and sellers learn the true value of the new product from experiments with it buyers have heterogeneous preferences over the products and sellers compete in prices the pricing policies and market shares in the unique markov perfect equilibrium are obtained explicitly the dynamics of the equilibrium market shares display excessive sales of the new product relative to the social optimum in early stages and too low sales later on the diffusion path of a successful product is s shaped

performance versus design standards in the regulation of pollution abstract this paper presents a model of pollution regulation in an oligopolistic market two forms of regulation are considered performance standards which regulate pollution directly by an upper limit on emissions and design standards which regulate pollution indirectly by a minimum usage requirement of an enissions control input equilibria under each regulatory regime are characterized a welfare analysis reveals that performance standards are preferred to design standards if the objective is minimization of emissions plus pollution damage costs however the comparison is indeterminate if the regulator s objective is total surplus less pollution damage an equivalence between emissions taxes and performance standards is established so the above welfare comparisons also apply to emissions taxes versus design standards

should we pay for ecosystem service outputs inputs or both payments for ecosystem service outputs have recently become a popular policy prescription for a range of agri environmental schemes the focus of this paper is on the choice of contract instruments to incentivise the provision of ecosystem service outputs from farms the farmer is better informed than the regulator in terms of hidden information about costs and hidden actions relating to effort the results show that with perfect information the regulator can contract equivalently on inputs or outputs with hidden information input based contracts are more cost effective at reducing the informational rent related to adverse selection than output based contracts mixed contracts are also cost effective especially where one input is not observable such contracts allow the regulator to target variables that are costly to fake as opposed to those prone to moral hazard such as effort further results are given for fixed price contracts and input based contracts with moral hazard the model is extended to include a discussion of repeated contracting and the scope that exists for the regulator to benefit from information revealed by the initial choice of contract the models are applied to a case study of contracting with farmers to protect high biodiversity native vegetation that also provides socially valuable ecosystem services

social learning and delay in a dynamic model of price competition abstract this paper studies dynamic price competition between two firms selling differentiated durable goods to two buyers whose valuations of the two goods depend on their own private type as well as that of the other buyer we derive a key intertemporal property of the equilibrium prices and construct an equilibrium based on this property we show that social learning reduces the equilibrium prices in the sense that when the buyers are more interdependent and hence have a stronger incentive to wait and see the firms respond by lowering their period 1 prices interestingly we find that this response by the firms along with the intertemporal property of the equilibrium prices implies that buyers delay their decisions less often when they become more interdependent

waterfall versus sprinkler product launch strategy influencing the herd a seller decides the price and sequence in which a product of unknown value is introduced to consumers consumers inspect the product before consumption and observe past prices and sales consumption at a high price is informative for later consumers as it indicates that the product is likely to be of high value i show that on an average prices decrease over time however expected revenue on an average rises over time for a high enough discount factor i find that for extreme beliefs the firm introduces the product to all consumers but for intermediate values the product is introduced only to one consumer

price and advertising signals of product quality we present a signaling model based on ideas of phillip nelson in which both the introductory price and the level of directly uninformative advertising or other dissipative marketing expenditures are choice variables and may be used as signals for the initially unobservable quality of a newly introduced experience good repeat purchases play a crucial role in our model a second focus of the paper is on illustrating an approach to refining the set of equilibria in signalling games with multiple potential signals

an ex post welfare analysis of natural gas regulation in the industrial sector the current structure of the us natural gas industry is a result of the evolution of regulatory policy over the past three decades which began with the deregulation of natural gas prices at the wellhead ngpa of 1978 and culminated with the deregulation of interstate transportation of natural gas ferc order 636 focusing on the industrial sector this paper estimates the welfare and price effects associated with the changes in regulatory policy overtime actual prices converge towards estimated equilibrium prices consequently deadweight losses diminished an estimated 15 47 billion 2003 dollars of welfare loss had been incurred from 1977 to 2000

behind the revolving door a new view of public utility regulation regulatory officials frequently work for firms they regulate after they leave office this revolving door has been the subject of much scrutiny owing to the natural suspicion of corruption in a time dependent supergame i take a strategic look behind the revolving door and find it can lead to improved performance of regulated industries when firm managers and regulators have finite and concurrent terms investment incentives are minimal staggered terms and revolving doors can result in improved performance of regulated firms when each side s actions at each date are contingent on past outcomes

regulating an externality generating public utility a multi dimensional screening approach abstract in this paper i present a monopoly screening model in which a firm holds private information on fixed abatement costs because of the nature of the optimal contracts bunching is never optimal even with n distinct types a characterization of full and limited information solutions is offered and it is shown that the design standards alone determine the value of an information rent the variable charge is completely free of any marginal information costs this allows the variable charge to track marginal damages and thereby ensures that marginal social costs are covered a fixed charge implements the optimal solution

competition policy in the united states an overview this paper provides a summary of the basic policies in the united states that affect the state of competition in u s markets much of the paper focuses on antitrust policy but a substantial fraction of the paper is devoted to regulatory policies for both types of policies the paper explains the basic structures of the policies and also provides discussions of recent developments copyright 1993 by oxford university press

contributions of neoclassical economics to public utili iy analysis neoclassical economics the dominant economics paradigm has influenced and been influenced by developments in regulated industries we identify major theoretical and empirical accomplishments discuss the impactofthese accomplishmentsonpolicydevelopment andlist the channelsthrough which the impacts are madepossible we then discuss regulatorypolitics lack ofresearchperspective an overly narrow focus on economic efficiency and the academic profession as factors limiting the impact of neoclassical economics on public policy

on some agency costs of intermediated contracting abstract this paper identifies a new agency cost of intermediated contracting a non productive intermediary can extract some rents when a the productive agent has some private information and b the intermediary s sub contract with the productive agent is not directly controlled by the top principal we show that the intermediary s informational rent is an increasing and concave function of the productive agent s own informational rent

the multiprincipal nature of government abstract one of the theoretical tools required to open the black box of the government organization is the theory of multiprincipals which describes how different incentive mechanisms compete with each others in viewing the set of relationships between several government bodies and the entities they regulate as a set of competing contracts in which the control of the regulatory process is shared amongst these different regulators we can address the question of the costs and the possible benefits of such structural separation first this paper surveys the previous literature on the topic then it traces out the possible benefits of such structures to the non benevolence of regulators we discuss also how regulatory rights of control and communication channels must be designed all together to deal with this problem

u s industry adjustment to economic deregulation conomic deregulation does not happen overnight it takes time for lawmakers and regulators to dismantle regulatory regimes and then it takes more time for the deregulated industries to adjust to their new competitive environment federal regulatory agencies and the u s congress began liberalizing pricing entry and exit in the transportation financial energy and communications industries during the mid 1970s but while some smaller industries such as intercity bus transportation and air cargo have been fully deregulated during that time the only major american industries fully deregulated to date are airlines and motor carriers as to the pace of industry adjustment consider airlines economic deregulation of the airline industry began in 1974 when the civil aeronautics board first encouraged experiments with discount fares it was completed in 1983 when all regulations on fares entry and exit were eliminated yet more than 20 years after the deregulatory process began the airline industry continues to shed inefficiencies that accumulated over decades of regulation and to find new ways to market their service indeed the airlines latest marketing innovation selling discount fares on the internet would be illegal if fares were still regulated it is not surprising that deregulated or partially deregulated industries are slow to achieve maximum efficiency when regulatory restrictions on pricing operations and entry especially from new firms have been enforced for decades managers and employees of regulated firms settle into patterns of inefficient production and missed opportunities for technological advance and entry into new markets deregulation frees an industry from the state s control over prices entry and exit although of course firms are still subject to antitrust laws and safety regulations after deregulation some costs usually fall in short order but it takes

believing in economic theories sex lies evidence trust and ideology i introduction beliefs about the descriptive validity of economic theories may influence preferences among economic policies if so these beliefs may shape and constrain economic institutions and policies in democracies we examine how beliefs about the descriptive validity of supply and demand theory respond to evidence and how these beliefs are related to individual attitudes and demographic characteristics with a strong focus on the potential role played by ideology political economists usually view heterogeneity of policy preferences as mostly reflecting heterogeneity of values interests or goals a large interdisciplinary debate continues about the relative importance of diverse self interests and public spirited goals in explaining political outcomes but the potential role played by diversity of positive beliefs has received relatively little attention preferences under uncertainty are typically decomposed into values utilities of outcomes and beliefs about the likelihoods of outcomes suggesting that heterogeneity of policy preferences may derive as much from differences in beliefs about how the economic world functions as from differences in interests such descriptive beliefs frequently differ sharply from those of economists slembeck 2003 for instance blendon et al 1997 reported that only 28 of the us public think price increases are mainly due to the laws of supply and demand and nearly three fourths of the public believed that the increase in gasoline prices in 1996 was due more to the oil companies trying to increase profits than to supply and demand while 85 of economists believed that supply and demand explained the price increase the recurring significance of ideology or proxies for it in empirical studies of political outcomes provides one reason to take this idea seriously rubin 2001 concluded that while electoral constraints based on voter interests limit politicians behavior factors measuring ideology have large power in explaining congressional voting ideology could reflect self interest but other explanations are possible from the perspective of bounded rationality people might use ideology heuristically to evaluate descriptive claims when evidence is scant or hard to evaluate from a game theoretic perspective people may regard descriptive claims made by others with ideologies different from their own as manipulation attempts and hence may discount them particularly in the long run causality may run the other way around revisions of descriptive beliefs about the workings of the economic world may bring about changes in ideology we address some of these matters below and discuss others in our conclusions romer 2003 p 29 offered a theoretical account of how diverse but correlated beliefs can lead to inefficient policy outcomes even when interests do not vary and concluded that t he research program suggested by this paper is that of bringing ideology back into the analysis of politics there may be a great deal to be learned if we do not presume that ideology is just a mask for individuals well informed pursuit of their self interest but instead consider the possibility that it often reflects individuals beliefs and that these beliefs often influence their actions our results here provide some evidence supporting this view we understand of course that the student respondents we examine in this study are a narrowly selected subset of any polity 1 bearing this in mind perhaps it is best to view our work as illustrating an approach to exploring the relationship between ideology and descriptive belief still more broadly we freely combine econometric and experimental methods of economics with survey measurement tools borrowed from political and social psychology our work here may also be regarded as an applied introduction to some of the latter tools

deregulation ownership and productivity growth in the banking industry evidence from india this paper analyzes the relationship between deregulation and total factor productivity tfp growth in the indian banking industry using a generalized shadow cost function approach tfp growth is decomposed into a technological change a scale and a miscellaneous component a disaggregated panel data analysis using the population of public and private banks over 1985 96 that covers both pre and post deregulation periods indicates that a significant decline in regulatory distortions and the anticipated increase in tfp growth have not yet materialized following deregulation while private sector banks have improved their performance mainly due to the freedom to expand output public sector banks have not responded well to the deregulation measures

intertemporal common agency and organizational design how much decentralization abstract in common agency where one agent contracts with several principals to what extent should the principals cooperate and centralize provision of incentives if the agency is over contract complements where an increase in activity for one principal increases the marginal value of contracting with other principals complete centralization seems optimal since this internalizes all externalities we show that this intuition is not generally valid for dynamic agency situations for although centralization provides more accurate incentives to the agent it also aggravates the ratchet effect and this negative effect may dominate the optimal degree of decentralization is discussed and partly characterized

endogenous deregulation evidence from oecd countries abstract this paper presents empirical evidence regarding the effect of endogenous deregulation on productivity we find that treating deregulation across oecd countries as an exogenous event overestimates the competitive impact of deregulation on productivity by as much as 40

alternative environmental regulation schemes for the belgian power generation sector this paper discusses the effects of alternative waysof using external cost estimates to regulateinvestments and generation in the electricityproduction sector starting from the existing system four alternatives are considered emission taxes forthe utility and for independent producers emissiontaxes limited to the electric utility emissionpermits limited to the electric utility and finally asystem where only investments are regulated anddispatch is not taking external damage estimates fromthe literature these alternatives are compared usinga dynamic partial equilibrium model of the belgianelectricity market for the period 1995 2034 theefficiency and distribution effects of the alternativeenvironmental policy instruments are quantified

regulating an externality generating utility environmental taxes under limited information global warming is currently an important item on most nationalenvironmental agendas in many countries coal fired electricity generatingstations represent an important source of greenhouse gases we examinehow regulations to curb emissions affect public utility pricing regulationwhen regulators act non cooperatively we show that when there is limitedinformation on fixed abatement costs an environmental regulator prefersan emission tax over an output tax or a lump sum environmental tax thepublic utility regulator prefers the lump sum tax regime

the switching effect of environmental taxation within bertrand differentiated duopoly we investigate second best optimal taxation of the polluting variety of a product in a bertrand duopoly with differentiated varieties the analysis provides novel insight on a useful social function of environmental regulation besides internalizing the environmental externality the taxation of the polluting variety improves the matching of consumers and product varieties and so creates a socially desirable business switching between the differentiated varieties

regulating a monopolist with unknown costs we consider the problem of how to regulate a monopolistic firm whose costs are unknown to the regulator the regulator s objective is to maximize a linear social welfare function of the consumers surplus and the firm s profit in the optimal regulatory policy prices and subsidies are designed as functions of the firm s cost report so that expected social welfare is maximized subject to the constraints that the firm has nonnegative profit and has no incentive to misrepresent its costs we explicitly derive the optimal policy and analyze its properties in their classic papers dupuit 2 and hotelling 5 considered pricing policies for a bridge that had a fixed cost of construction and zero marginal cost they demonstrated that the pricing policy that maximizes consumer well being is to set price equal to marginal cost and to provide a subsidy to the supplier equal to the fixed cost so that a firm would be willing to provide the bridge this first best solution is based on a number of informational assumptions first the demand function is assumed to be known to both the regulator and to the firm while the assumption of complete information may be too strong the assumption that information about demand is as available to the regulator as it is to the firm does not seem unnatural a second informational assumption is that the regulator has complete information about the cost of the firm or at least has the same information about cost as does the firm this assumption is unlikely to be met in reality since the firm would be expected to have better information about costs than would the regulator as weitzman has stated an essential feature of the regulatory environment i am trying to describe is uncertainty about the exact specification of each firm s cost function in most cases even the managers and engineers most closely associated with production will be unable to precisely specify beforehand the cheapest way to generate various hypothetical output levels because they are yet removed from the production process the regulators are likely to be vaguer still about a firm s cost function 12 p 684 as this observation suggests it is natural to expect that a firm would have better information regarding its costs than would a regulator the purpose of this paper is to develop an optimal regulatory policy for the case in which the regulator does not know the costs of the firm one strategy that a regulator could use in the absence of full information about costs is to give the firm the title to the total social surplus and to delegate the pricing decision to the firm in pursuing its own interests which would then be to maximize the total social surplus the firm would adopt the same marginal cost pricing strategy that the regulator would have imposed if the regulator had

renegotiation design with multiple regulators abstract one striking feature of the internal organization of governments is the existence of multiple regulators this paper explains this organizational choice as coming from the government s limited ability to commit the separation of powers between two regulators is modeled as a stackelberg common agency game with respect to the case of a single regulator the allocative efficiency and the regulated firm s informational rent are both reduced in the unique equilibrium of this game however when regulators have a limited ability to commit this static cost of regulators separation becomes a dynamic benefit separation makes renegotiation harder and improves commitment journal of economic literature classification numbers d82 l51