Working Paper: CEPR ID: DP5643
Authors: Emmanuelle Auriol; Pierre M. Picard
Abstract: The paper studies the impact of government budget constraint in a pure adverse selection problem of monopoly regulation. The government maximizes total surplus but incurs some cost of public funds à la Laffont and Tirole (1993). An alternative to regulation is proposed in which firms are free to enter the market and to choose their price and output levels. However the government can contract ex-post with the private firms. This ex-post contracting set-up allows more flexibility than traditional regulation where governments commit to both investment and operation cash-flows. This is especially relevant in case of high technological uncertainties.
Keywords: Adverse selection; Natural monopoly; Privatization; Regulation; Soft-budget constraint
JEL Codes: D82; L33; L43; L51
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| government outsourcing (L33) | higher production levels (E23) |
| government outsourcing (L33) | improved overall welfare (I30) |
| government outsourcing (L33) | better management of technological uncertainties (O33) |
| government outsourcing (L33) | reduced financial burden on government (H69) |
| traditional regulation (K20) | lower production levels (E23) |
| traditional regulation (K20) | increased financial burden on government (H59) |