The Effect of Awareness and Observability on the Non-contractible Investment of a Regulated Natural Monopoly

Ismail Saglam

Journal of Industry, Competition and Trade, 2019, vol. 19, issue 4, No 4, 617-639

Abstract: Abstract This paper studies the joint effect of the regulator’s ex-ante awareness and ex-post ability to observe on the non-contractible investment activities of a natural monopoly with private marginal cost information. We show that the investment activities are lower when the regulator is ex-ante aware of their existence and ex-post able to observe them than when the regulator is never aware of, and never able to observe, them. This result, which points to the regulated firm’s prevention of ratcheting, is in line with an earlier finding of Tirole (J Polit Econ 94:235–259 1986) obtained in a bargaining model of procurement with two-sided asymmetric information. We also find that the producer welfare and the social surplus is always ex-ante higher when the regulator is unaware of its investment activities than when she is aware. Moreover, our computations show that depending on the specifications of our model, the unawareness of the regulator may positively affect the expected consumer and social welfares, as well.

Keywords: Monopoly; Regulation; Investment; Awareness; Observability; Asymmetric information (search for similar items in EconPapers)
JEL-codes: D82 L51 O32 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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DOI: 10.1007/s10842-019-00306-3

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