Liberal Regulation: Privatization of Natural Monopolies with Adverse Selection

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 nat...

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Bibliographic Details
Published inIDEAS Working Paper Series from RePEc
Main Authors Auriol, E, Picard, P M
Format Paper
LanguageEnglish
Published St. Louis Federal Reserve Bank of St. Louis 01.01.2004
Subjects
Adverse selection
Regulation
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Summary: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 regulationwhere governments commits to both investment and operation cash-flows.(This abstract was borrowed from another version of this item.)