Using Cost Observation to Regulate Firms

External markets and regulation

“…for (A.2) in the class of piecewise continuously differentiable functions follows from Theorem 3 in Guesnerie and Laffont (1984). Further, from Appendix C of Laffont and Tirole (1986), this q*( .) is optimal in the set of non-decreasing functions as well.…”

“…Some formulations place a positive weight on the firm's protits. Also, Laffont and Tirole (1986) consider introducing a parameter i that allows the marginal welfare of revenues to differ from unity. Both extensions are straightforward and do not alter the substance of our results.…”

“…As a result, 'external' markets provide regulators with additional policy options for the strategic influence of firm behavior in the presence of asymmetric information. Without an 'external' market, asymmetric information introduces an incentive cost and, consequently, the optimal policy is forced to distort 'internal' production below the first-best level [Baron and Myerson (1982), Sappington (1983), Baron and Besanko (1984) and Laffont and Tirole (1986)]. We show that profit opportunities presented by an 'external' market can be used to absorb some (all, when the firm is an 'external' price taker) of the incentive cost, and thus insulate the 'internal' market from quantity distortions.…”

Nouvelles formes de réglementation

“…Le modèle de Laffont-Tirole (1986, pour les achats publics et la réglementation des monopoles multiproduits respectivement, autorise l'observation (éventuellement bruitée) des coûts et introduit une double asymétrie d'information entre le régulateur et l'entreprise. D'une part, comme dans le modèle BaronMyerson, il existe un paramètre de productivité connu de l'entreprise mais pas du régulateur -problème dit de risque moral ou d'action cachée.…”

Incomplete Regulation, Asymmetric Information, and Collusion-Proofness

“…Baron and Myerson [1], Laffont and Tirole [2], and Lewis and Sappington [3] focused on the design of an optimal regulation contract in a monopoly under asymmetric information. On the first two papers the regulator was not aware of the monopolist's marginal costs, while in the last that private information was related to the market's demand function.…”