Liberal regulation: privatization of natural monopolies with adverse selection
(2004)
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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 A 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 moneyloosing firms and that welfare is larger than under traditional regulation where governments commits to both investment and operation cash-flows.
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Citations
Auriol, E., & Picard, P. (2004). Liberal regulation: privatization of natural monopolies with adverse selection (ECON Discussion Papers 2004/24). https://hdl.handle.net/2078.5/79652