Optimal regulation of network expansion

Research output: Contribution to journalArticleScientificpeer-review

Abstract

We model the optimal regulation of continuous, irreversible, capacity expansion, where a regulated firm has private information about capacity costs, investments are financed from the firm's cash flows, and demand is stochastic. The optimal mechanism can be implemented as a revenue tax that increases with the level of 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.
LanguageEnglish
Pages23-42
JournalRAND Journal of Economics
Volume49
Issue number1
DOIs
StatePublished - Apr 2018

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Optimal regulation
Price caps
Costs
Tax revenues
Asymmetric information
Capacity expansion
Subsidies
Information rent
Laissez-faire
Cash flow
Private information
Monopolist

Cite this

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Optimal regulation of network expansion. / Willems, Bert; Zwart, Gijsbert.

In: RAND Journal of Economics, Vol. 49, No. 1, 04.2018, p. 23-42.

Research output: Contribution to journalArticleScientificpeer-review

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