Optimal regulation of network expansion

Bert Willems*, Gijsbert Zwart

*Corresponding author for this work

Research output: Contribution to journalArticleAcademicpeer-review

12 Citations (Scopus)
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Abstract

We model the regulation of irreversible capacity expansion by a firm with private information about capacity costs, where investments are financed from the firm's cash flows and demand is stochastic. The optimal mechanism is implemented by a revenue tax that increases with the price cap. If the asymmetric information has large support, then the optimal mechanism consists of a laissez-faire regime for low-cost firms. That is, the firm's price cap corresponds to that of an unregulated monopolist, and it is not taxed. This maximal distortion at the top is necessary to provide information rents, as direct subsidies are not feasible.

Original languageEnglish
Pages (from-to)23-42
Number of pages20
JournalRand Journal of Economics
Volume49
Issue number1
DOIs
Publication statusPublished - 2018

Keywords

  • PUBLIC-PRIVATE PARTNERSHIPS
  • PRICE-CAP REGULATION
  • IRREVERSIBLE INVESTMENT
  • INCOMPLETE CONTRACTS
  • RENEGOTIATION
  • RISK
  • FIRM
  • INFRASTRUCTURE
  • UNCERTAINTY
  • MONOPOLIST

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