January 9, 2017, 11:00–12:15
Toulouse
Room MS001
Department Seminar
Abstract
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.