Regulating a monopolist with uncertain costs without transfers. Issue 4 (25th November 2022)

• Record Type: Journal Article
• Authors: Amador, Manuel; Bagwell, Kyle
• Is Part Of: Theoretical economics. Volume 17:Issue 4(2022)
• Page Start: 1719
• Page End: 1760
• Publication Date: 2022-11-25
• Subjects: Regulation -- price caps -- delegation theory; L43 -- L5 -- D82; Economics -- Periodicals; 330.01
• DOI: 10.3982/TE4691
• Languages: English
• ISSNs: 1933-6837

Abstract

Abstract : We analyze the Baron and Myerson (1982) model of regulation under the restriction that transfers are infeasible. Extending techniques from the delegation literature to incorporate an ex post participation constraint, we report sufficient conditions under which optimal regulation takes the form of price‐cap regulation. We establish conditions under which the optimal price cap is set at a level such that no types are excluded and show that exclusion of higher cost types can be optimal when these conditions fail. We also provide conditions for the optimality of price‐cap regulation when an ex post participation constraint is present and exclusion is infeasible.