Séminaire

Optimal regulation of network expansion

Bert Willems

9 janvier 2017, 11h00–12h15

Toulouse

Salle MS001

Department Seminar

Résumé

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 consists can be implemented as revenue tax that increases with the level of congestion. If the degree of asymmetric information is large, then the optimal mechanism consists of a laissez-faire regime for low-cost firms. That is, the firm delays investments as if it were 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.