Public Firms as Regulatory Instruments with Cost Uncertainty

Devon Garvie and Roger Ware ()

Canadian Journal of Economics, 1996, vol. 29, issue 2, 357-78

Abstract: We re-examine the regulatory role of a public firm in an environment of private but correlated information about industry costs. We study three regimes of mixed-market interaction involving both public and private firms: a symmetric Bayesian-Nash equilibrium, an asymmetric Bayesian equilibrium in which the public firm is able to commit to production before the private firms, and a mechanism in which the regulator designs an incentive-compatible schedule for the industry. We find that a public firm plays an important strategic informational role which strengthens its role as a disciplinary regulatory instrument. Further, we find that this strategic informational role is considerably enhanced as we move from indirect regulatory schemes to direct regulation.

Date: 1996
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