Regulating investments when both costs and need are private

Elena Panova and Daniel F. Garrett

No 23-1429, TSE Working Papers from Toulouse School of Economics (TSE)

Abstract: Large-scale infrastructure investments are often carried out in settings where their eventual usefulness or importance is diffcult to predict. This paper studies optimal incentives for investment when the agent undertaking the investment has superior information on two dimensions: the cost of investment and the likelihood it is useful or beneficial to the principal. Usefulness eventually becomes public, but punishments are limited as the regulator aims at ensuring the agent earns non-negative profits irrespective of eventual usefulness. We characterize the optimal screening mechanism and show that the optimal mechanism depends heavily on the degree of asymmetric information about usefulness. When the asymmetry of information about usefulness is severe, the optimal mechanism can feature upward distortions in investment and rent for all agent types.

Keywords: Monopoly regulation; Multidimensional screening (search for similar items in EconPapers)
JEL-codes: D81 D82 L51 (search for similar items in EconPapers)
Date: 2023-04-26, Revised 2025-08
New Economics Papers: this item is included in nep-cta, nep-mic and nep-reg
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Persistent link: https://EconPapers.repec.org/RePEc:tse:wpaper:128054

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