Optimal regulation of network expansion

Willems, Bert and Zwart, Gijsbert (2018) Optimal regulation of network expansion. RAND Journal of Economics, 49 (1). pp. 23-42.

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Official URL: http://tse-fr.eu/pub/32532


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.

Item Type: Article
Language: English
Date: 2018
Refereed: Yes
Uncontrolled Keywords: regulation, real option value, asymmetric information, optimal contracts
Divisions: TSE-R (Toulouse)
Site: UT1
Date Deposited: 22 May 2018 09:30
Last Modified: 15 Jul 2019 11:22
OAI ID: oai:tse-fr.eu:32532
URI: http://publications.ut-capitole.fr/id/eprint/25871

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