The politics of government decision making : regulatory institutions

Public decision makers are given a vague mandate to regulate industries. Restrictions on their instruments or scope of regulation affect their incentives to identify with interest groups and the effectiveness of supervision by watchdogs. This idea is illustrated in the context of the regulation of a natural monopoly. Much of the theoretical literature has assumed that a benevolent regulator is prohibited from operating transfers to the firm and maximizes social welfare subject to the firm's budget constraint. The tension between the assumptions of benevolence and of restrictions on instruments in such models leads us to investigate the role played by the mistrust of regulators in the development of this institution. We compare two mandates: average cost pricing (associated with the possibility of transfers). The regulator may identify with the industry, but a regulatory hearing offers the advocacy groups (watchdogs) an opportunity to alter the proposed rule making. The comparison between the two mandates hinges on the dead-weight loss associated with collusion and on the effectiveness of watchdog supervision.Supported by the Ford Foundation, the Pew Charitable Trust, the Guggenheim Foundation, the Center for Energy Policy Research at MIT, the National Science Foundation and the French Ministere de l'Education Nationale

Auction design and favoritism

The theory of auctions has ignored the fact that often auction designers, not the principal, design auctions. In a multi attribute auction, the auction designer may bias his subjective evaluation of quality or distort the relative weights of the various attributes to favor a specific bidder, an ancient concern in the procurement of weapons, in the auctioning of government contracts and in the purchase of electricity by regulated power companies. The paper analyzes the steps to be taken to reduce the possibility of favoritism. It is first shown that in the absence of favoritism, quality differentials among firms are more likely to be ignored if the auction designer has imperfect information about the firm's costs. Second, if the auction designer may collude with only one bidder, the other bidders should be chosen if they are as least as efficient as the former bidder, and no hard information about quality differentials is released by the auction designer that would justify fair discrimination in favor of the former bidder. Last, if the auction designer can collude with any bidder, the optimal auction tends to a symmetric auction in which quality differentials are ignored. The possibility of favoritism reduces the auction designer's discretion and makes the selection process focus on non-manipulable (monetary) dimensions of bids.Supported by the Pew Charitable Trust, the Ford Foundation, and the MIT Energy Lab

Managerial switching and myopia

Pew Charitable Trust, the Center for Energy Policy Research at MIT and the National Science Foundatio

On the receiver pays principle

This paper extends the theory of network competition between telecommunications operators by allowing receivers to derive a surplus from receiving calls (call externality) and to affect the volume of communications by hanging up (receiver sovereignty). We investigate the extent to which receiver charges can lead to an internalization of the calling externality. When the receiver charge and the termination (access) charge are both regulated, there exists an e±cient equilibrium. Effciency requires a termination discount. When reception charges are market determined, it is optimal for each operator to set the prices for emission and reception at their off-net costs. For an appropriately chosen termination charge, the symmetric equilibrium is again effcient. Lastly, we show that network-based price discrimination creates strong incentives for connectivity breakdowns, even between equal networks.Networks, interconnection, competition policy

Repeated auctions of incentive contracts, investment and bidding parity : with an application to takeovers

This paper considers a two-period model of repeated franchise bidding or second sourcing. A regulator contracts with a single firm in each period, presumably because of increasing returns to scale. The incumbent firm invests in the first period. The investment may be transferable to a second source or not; and may be monetary or in human capital. Each firm has private information about its intrinsic efficiency, and, if it is selected to produce. about the cost-reducing effort it exerts and the investment it makes. The regulator, however, observes the firm's realized cost at the end of the period (the cost includes monetary investments and may be random). In the second period the incumbent firm can be replaced by an entrant. The regulator commits to an optimal breakout rule. The paper generalizes an earlier result that the optimal policy is to regulate through contracts linear in cost overruns. It also derives conclusions concerning the intertemporal evolution of incentive schemes. Mainly, it puts emphasis on the issue of bidding parity. It shows that three basic effects guide the optimal bias in the second-period auctioning process and determines whether the incumbent should be favored depending on the nature of investments. The outcome of the analysis is a relatively pessimistic assessment of the desirability of second sourcing when sizeable investments are at stake. Last we reinterpret the second source as a raider, and the breakout as a takeover. We discuss the desirability of defensive tactics, and obtain some relationships between the size of managerial stock options, the amount of defensive tactics, the firm's performance and the probability of a takeover.Commissariat du Plan and the Center for Energy Policy Research at MI

A Theory of Incentives in Procurement and Regulation

More then just a textbook, A Theory of Incentives in Procurement and Regulation will guide economists' research on regulation for years to come. It makes a difficult and large literature of the new regulatory economics accessible to the average graduate student, while offering insights into the theoretical ideas and stratagems not available elsewhere. Based on their path breaking work in the application of principal-agent theory to questions of regulation, Laffont and Tirole develop a synthetic approach, with a particular, though not exclusive, focus on the regulation of natural monopolies such as military contractors, utility companies, and transportation authorities.The book's clear and logical organization begins with an introduction that summarizes regulatory practices, recounts the history of thought that led to the emergence of the new regulatory economics, sets up the basic structure of the model, and previews the economic questions tackled in the next seventeen chapters. The structure of the model developed in the introductory chapter remains the same throughout subsequent chapters, ensuring both stability and consistency. The concluding chapter discusses important areas for future work in regulatory economics. Each chapter opens with a discussion of the economic issues, an informal description of the applicable model, and an overview of the results and intuition. It then develops the formal analysis, including sufficient explanations for those with little training in information economics or game theory. Bibliographic notes provide a historical perspective of developments in the area and a description of complementary research. Detailed proofs are given of all major conclusions, making the book valuable as a source of modern research techniques. There is a large set of review problems at the end of the book.xxii, 705 hlm,; 18 x 26 c