Liberal regulation: privatization of natural monopolies with adverse selection

Emmanuelle Auriol and Pierre Picard

No 2004013, LIDAM Discussion Papers CORE from Université catholique de Louvain, Center for Operations Research and Econometrics (CORE)

Abstract: 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.

Keywords: privatization; soft-budget contraint; adverse selection; regulation; natural monopolies (search for similar items in EconPapers)
JEL-codes: D82 L33 L43 L51 (search for similar items in EconPapers)
Date: 2004-04
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Related works:
Working Paper: Liberal Regulation: Privatization of Natural Monopolies with Adverse Selection (2004)
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