Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/242536
Authors: 
Meade, Richard
Year of Publication: 
2015
Series/Report no.: 
Economics Working Paper Series No. 2015/05
Abstract: 
We extend the theory of monopoly regulation under imperfect information to the case of customer, rather than investor, ownership. The firm's manager can exert two types of effort - a contractible effort to reduce costs, and a non-contractible effort to increase quality. The former decreases expected costs and increases expected profits, while the latter increases expected demand, costs and consumer surplus. We show that the manager faces a conflict between pursuing cost reductions and quality when his or her net marginal disutility of cost-reducing effort is sufficiently increased by quality-enhancing effort. We further show that this conflict can arise even without an effort substitution effect. Thus stronger incentives (i.e. a higher managerial profit share) induce greater cost-reducing effort, but lower quality-enhancing effort. Since customer owners value consumer surplus as well as profits, they optimally provide the manager with weaker incentives than investor owners - who only value profits - for a given regulated price. This implies higher quality but lower efficiency under customer ownership, given price. A customer-owned firm is optimally set a tighter price cap than an investor-owned firm if its profits are less price-sensitive than is relative consumer surplus. This can result in quality differences being reduced between ownership types, but with ambiguous impacts on efficiency differences. Failure to account for ownership-related differences in objective functions gives rise to regulatory distortions.
Subjects: 
Regulation
Moral Hazard
Cooperatives
Electric Utilities
Gas
Water Utilities
Profit Sharing
JEL: 
D82
J33
L51
L94
L95
P13
Document Type: 
Working Paper

Files in This Item:
File
Size





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.