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Optimal regulation of network expansion

Willems,Bert
; 
Zwart,Gijsbert
Abstract
We model the optimal regulation of continuous, irreversible, capacity expansion, where a regulated firm has private information about capacity costs, investments are financed from the firm's cash flows, and demand is stochastic. The optimal mechanism can be implemented as a revenue tax that increases with the level of the price cap. If the asymmetric information has large support, then the optimal mechanism consists of a laissez-faire regime for low-cost firms. That is, the firm's price cap corresponds to that of an unregulated monopolist, and it is not taxed. This `maximal distortion at the top' is necessary to provide information rents, as direct subsidies are not feasible.
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Date
2018-04
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Tilburg University Research Output Collection
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Keywords
D81 - Criteria for Decision-Making under Risk and Uncertainty, D82 - Asymmetric and Private Information ; Mechanism Design, L51 - Economics of Regulation
Citation
Willems, B & Zwart, G 2018, 'Optimal regulation of network expansion', RAND Journal of Economics, vol. 49, no. 1, pp. 23-42. https://doi.org/10.1111/1756-2171.12217
URI
https://hdl.handle.net/20.500.14602/67492
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