CAN REGULATION INCREASE FIRM'S EFFICIENCY?

Giuseppe Coco () and Claudio De Vincenti

No 60, Working Papers from Sapienza University of Rome, Department of Public Economics

Abstract: This paper examines the possibility that regulation actually increases a monopolist’s cost-efficiency. When the firm’s cost-reducing effort depends on the output supplied, a binding price-cap, by compelling the monopolist to produce more, finally results in lower costs. On the basis of a two-period asymmetric information model with a repeated choice of effort, the paper demonstrates that regulation increases efficiency when the elasticity of demand is sufficiently low, even assuming very conservative preferences and a very poor information set for the regulator. Moreover, contrary to previous findings and conventional wisdom, we find that a periodical rate base review exerts also a positive effect on future cost-reducing effort countervailing the well known ratchet effect.

Keywords: Price-cap; regulatory lag (search for similar items in EconPapers)
JEL-codes: L51 D42 (search for similar items in EconPapers)
Date: 2003-09
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Persistent link: http://EconPapers.repec.org/RePEc:sap:wpaper:60

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