Faure-Grimaud, Antoine and Reiche, Sonje (2003) Dynamic yardstick regulation. TE, 459. Suntory and Toyota International Centres for Economics and Related Disciplines, London School of Economics and Political Science, London, UK.
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This paper shows that the inability of regulators to commit to long-term contracts is irrelevant when there is some competition between regulated firms and when firms' private information is correlated. This sharply contrasts with the dynamic of regulation without such competition. The paper also explores what limitations on yardstick mechanisms can justify the use of long-term contracts. We found that the inability of a regulator to commit not to renegotiate long-term contracts is without consequences even if there is a bound on transfers that a firm can be asked to pay. In contrast, short-term contracting fails to implement the commitment solution with constraints on transfers. Second, absent current competition, the possibility of future entry allows the regulator to implement the first-best with a renegotiation-proof long-term contract whereas this cannot be achieved with short-term contracting.
|Item Type:||Monograph (Discussion Paper)|
|Additional Information:||© 2003 the authors|
|Uncontrolled Keywords:||Yardstick regulation; ratchet effect; short and long-term contracts; commitment|
|Library of Congress subject classification:||H Social Sciences > HD Industries. Land use. Labor|
|Journal of Economic Literature Classification System:||D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information|
|Sets:||Departments > Accounting and Finance
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