The Effect of Observability on the Noncontractible Investment of a Regulated Firm

Ismail Saglam

MPRA Paper from University Library of Munich, Germany

Abstract: We study the effect of observability on the noncontractible investment of a regulated firm with private marginal cost information. We show that the observability reduces investment, pointing to the regulated firm's prevention of ratcheting. This result, which is in line with an earlier finding of Tirole (1986) obtained in a bargaining model of procurement with two-sided asymmetric information, reveals that 'underinvestment due to observability' is independent of whether only the investing firm or all of the parties affected by its investment decision have some private information.

Keywords: Monopoly; Regulation; Investment; Observability; Asymmetric Information (search for similar items in EconPapers)
JEL-codes: D82 L51 O32 (search for similar items in EconPapers)
Date: 2017-01-03
New Economics Papers: this item is included in nep-cta and nep-mic
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