IDEAS home Printed from https://ideas.repec.org/a/bla/jpbect/v12y2010i2p225-247.html
   My bibliography  Save this article

Separation of Regulatory Powers When Contracts Are Incomplete

Author

Listed:
  • DAVID BARTOLINI

Abstract

The investment of a regulated firm affects the service/good provided on many dimensions. Should an integrated regulator take care of them all? Or is it better to have separate regulators responsible for them? We analyze the effect of the separation of regulatory powers on the regulated firm's ex ante incentive to invest in a “cooperative” innovation. The effects of the innovation are not verifiable and the cost of investing is sunk, hence, there is a problem of hold‐up. We find that when the innovation produces opposite effects the ex ante firm's incentive to invest is larger in the case of separation than in the case of integrated regulation. We also stress the risk of over‐investment that the separation of regulatory powers may induce. We maintain that along with classical incentive regulation—which mainly provides incentives for the firm to be efficient—the separation of regulatory powers may play a role in providing an incentive for cooperative innovations.

Suggested Citation

  • David Bartolini, 2010. "Separation of Regulatory Powers When Contracts Are Incomplete," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 12(2), pages 225-247, April.
    • Handle: RePEc:bla:jpbect:v:12:y:2010:i:2:p:225-247
    DOI: 10.1111/j.1467-9779.2009.01435.x
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/j.1467-9779.2009.01435.x
    Download Restriction: no
    File URL: https://libkey.io/10.1111/j.1467-9779.2009.01435.x?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Jehiel, Philippe & Moldovanu, Benny, 1995. "Negative Externalities May Cause Delay in Negotiation," Econometrica, Econometric Society, vol. 63(6), pages 1321-1335, November.
    2. Aghion, Philippe & Dewatripont, Mathias & Rey, Patrick, 1994. "Renegotiation Design with Unverifiable Information," Econometrica, Econometric Society, vol. 62(2), pages 257-282, March.
    3. Patrick Bolton & Michael D. Whinston, 1993. "Incomplete Contracts, Vertical Integration, and Supply Assurance," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 60(1), pages 121-148.
    4. Patrick Bolton & Mathias Dewatripont, 2005. "Contract Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262025760, April.
    5. Jamasb, Tooraj & Pollitt, Michael, 2007. "Incentive regulation of electricity distribution networks: Lessons of experience from Britain," Energy Policy, Elsevier, vol. 35(12), pages 6163-6187, December.
    6. Jean Tirole, 1999. "Incomplete Contracts: Where Do We Stand?," Econometrica, Econometric Society, vol. 67(4), pages 741-782, July.
    7. David P. Baron, 1985. "Noncooperative Regulation of a Nonlocalized Externality," RAND Journal of Economics, The RAND Corporation, vol. 16(4), pages 553-568, Winter.
    8. Schmitz, Patrick W, 2001. "The Hold-up Problem and Incomplete Contracts: A Survey of Recent Topics in Contract Theory," Bulletin of Economic Research, Wiley Blackwell, vol. 53(1), pages 1-17, January.
    9. Grubb,Michael & Jamasb,Tooraj & Pollitt,Michael G. (ed.), 2008. "Delivering a Low Carbon Electricity System," Cambridge Books, Cambridge University Press, number 9780521888844, September.
    10. Hart, Oliver D & Moore, John, 1988. "Incomplete Contracts and Renegotiation," Econometrica, Econometric Society, vol. 56(4), pages 755-785, July.
    11. Olsen, Trond E. & Torsvik, Gaute, 1995. "Intertemporal common agency and organizational design: How much decentralization?," European Economic Review, Elsevier, vol. 39(7), pages 1405-1428, August.
    12. Jean-Jacques Laffont & David Martimort, 1999. "Separation of Regulators Against Collusive Behavior," RAND Journal of Economics, The RAND Corporation, vol. 30(2), pages 232-262, Summer.
    13. Oliver Hart & Andrei Shleifer & Robert W. Vishny, 1997. "The Proper Scope of Government: Theory and an Application to Prisons," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 112(4), pages 1127-1161.
    14. Roger D. Congleton, 1984. "Commitees and rent-seeking effort," Springer Books, in: Roger D. Congleton & Arye L. Hillman & Kai A. Konrad (ed.), 40 Years of Research on Rent Seeking 1, pages 279-291, Springer.
    15. Martimort, David, 1999. "Renegotiation Design with Multiple Regulators," Journal of Economic Theory, Elsevier, vol. 88(2), pages 261-293, October.
    16. Donald B. Hausch & Yeon-Koo Che, 1999. "Cooperative Investments and the Value of Contracting," American Economic Review, American Economic Association, vol. 89(1), pages 125-147, March.
    17. Mark Armstrong & Simon Cowan & John Vickers, 1994. "Regulatory Reform: Economic Analysis and British Experience," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262510790, April.
    18. Klein, Benjamin & Crawford, Robert G & Alchian, Armen A, 1978. "Vertical Integration, Appropriable Rents, and the Competitive Contracting Process," Journal of Law and Economics, University of Chicago Press, vol. 21(2), pages 297-326, October.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Antonio Estache & Liam Wren-Lewis, 2009. "Toward a Theory of Regulation for Developing Countries: Following Jean-Jacques Laffont's Lead," Journal of Economic Literature, American Economic Association, vol. 47(3), pages 729-770, September.
    2. Committee, Nobel Prize, 2016. "Oliver Hart and Bengt Holmström: Contract Theory," Nobel Prize in Economics documents 2016-1, Nobel Prize Committee.
    3. Eduard Marinov, 2016. "The 2016 Nobel Prize in Economics," Economic Thought journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 6, pages 97-149.
    4. Schmitz, Patrick W., 2010. "Contractual solutions to hold-up problems with quality uncertainty and unobservable investments," Journal of Mathematical Economics, Elsevier, vol. 46(5), pages 807-816, September.
    5. Ilya Segal & Michael D.Whinston, 2012. "Property Rights [The Handbook of Organizational Economics]," Introductory Chapters,, Princeton University Press.
    6. Armstrong, Mark & Sappington, David E.M., 2007. "Recent Developments in the Theory of Regulation," Handbook of Industrial Organization, in: Mark Armstrong & Robert Porter (ed.), Handbook of Industrial Organization, edition 1, volume 3, chapter 27, pages 1557-1700, Elsevier.
    7. B. Boockmann & Paul Thurner, 2006. "Flexibility provisions in multilateral environmental treaties," International Environmental Agreements: Politics, Law and Economics, Springer, vol. 6(2), pages 113-135, June.
    8. Alan Schwartz, 2004. "The Law and Economics of Costly Contracting," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 20(1), pages 2-31, April.
    9. Robert Evans, 2008. "Simple Efficient Contracts in Complex Environments," Econometrica, Econometric Society, vol. 76(3), pages 459-491, May.
    10. Evelyn Korn & Stephan Meisenzahl, 2009. "Contracting still matters! Or: How to design a letter of intent," MAGKS Papers on Economics 200909, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    11. Vishal Agrawal & Nektarios Oraiopoulos, 2020. "The Role of Decision Rights in Codevelopment Initiatives," Manufacturing & Service Operations Management, INFORMS, vol. 22(4), pages 832-849, July.
    12. Schmitz, Patrick W, 2001. "The Hold-up Problem and Incomplete Contracts: A Survey of Recent Topics in Contract Theory," Bulletin of Economic Research, Wiley Blackwell, vol. 53(1), pages 1-17, January.
    13. Steven Shavell, 2007. "Contractual Holdup and Legal Intervention," The Journal of Legal Studies, University of Chicago Press, vol. 36(2), pages 325-354, June.
    14. Stephanie Rosenkranz & Patrick W. Schmitz, 2007. "Can Coasean Bargaining Justify Pigouvian Taxation?," Economica, London School of Economics and Political Science, vol. 74(296), pages 573-585, November.
    15. Alan Schwartz & Joel Watson, 2000. "Economic and Legal Aspects of Costly Recontracting," Yale School of Management Working Papers ysm143, Yale School of Management, revised 01 Jan 2001.
    16. Pablo Casas-Arce & Thomas Kittsteiner & F. Asís Martínez-Jerez, 2019. "Contracting with Opportunistic Partners: Theory and Application to Technology Development and Innovation," Management Science, INFORMS, vol. 65(2), pages 842-858, February.
    17. Makoto Hanazono, 2004. "Holdup with Subsidized Investment," KIER Working Papers 586, Kyoto University, Institute of Economic Research.
    18. Surajeet Chakravarty & Bentley MacLeod, 2004. "On the Efficiency of Standard Contracts the Case of Construction," Working Papers 874, Princeton University, Department of Economics, Industrial Relations Section..
    19. Antonio Nicita & Massimiliano Vatiero, 2009. "Incomplete Contracts, Irreversible Investments and Entry Deterrence," Department of Economics University of Siena 566, Department of Economics, University of Siena.
    20. Patrick W. Schmitz, 2001. "Partial Privatization and Incomplete Contracts: The Proper Scope of Government Reconsidered," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 57(4), pages 394-411, August.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:jpbect:v:12:y:2010:i:2:p:225-247. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://edirc.repec.org/data/apettea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.