Government Outsourcing: Contracting with Natural Monopoly

Picard, Pierre;Auriol, Emmanuelle
(2004)

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  • Picard, PierreUCLouvain
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  • Auriol, EmmanuelleUniversité de Toulouse I
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Abstract
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 à 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 money-loosing firms and that welfare is larger than under traditional regulation where governments commits to both investment and operation cash-flows.
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Picard, P., & Auriol, E. (2004). Government Outsourcing: Contracting with Natural Monopoly (CEPR Discussion paper 5643). https://hdl.handle.net/2078.5/250421