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The Need for Regulating a Bayesian Regulator

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  • Semih Koray
  • Ismail Saglam

Abstract

This paper analyzes the Baron and Myerson’s (B–M) (Econometrica 50: 911–930 [1982]) scheme of monopoly regulation, a standard representative of Bayesian mechanisms. As is well known, the hboxB–M mechanism (and other related mechanisms) have as an explicit starting point the assumption that the regulator has an unchallenged prior belief about the cost function of the regulated monopolist.We analyze here the consequences resulting from the possibility that this prior belief may be subject to influence or manipulable. As we show in detail, under the B–M scheme, consumers and the regulated monopoly are highly sensitive to the regulator’s prior belief about the (private) cost information of the monopolist. Therefore, if a regulator’s beliefs are unaccountable to and unverifiable by a higher ity, the regulator has both the incentive and the possibility to change and/or misrepresent his prior belief when facing pressure or payoffs from interest groups representing consumers or the regulated firm. The results here show that the outcomes under a B–M mechanism favoring one or another interest group can vary over a wide spectrum. The results are consistent with capture theory and rent-seeking explanations of monopoly regulation and suggest the need to exercise care in using the insights and results of Bayesian regulatory theory to inform practice. Copyright Springer Science+Business Media, Inc. 2005

Suggested Citation

  • Semih Koray & Ismail Saglam, 2005. "The Need for Regulating a Bayesian Regulator," Journal of Regulatory Economics, Springer, vol. 28(1), pages 5-21, July.
    • Handle: RePEc:kap:regeco:v:28:y:2005:i:1:p:5-21
    DOI: 10.1007/s11149-005-2353-z
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    References listed on IDEAS

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    8. Guesnerie, Roger & Laffont, Jean-Jacques, 1984. "A complete solution to a class of principal-agent problems with an application to the control of a self-managed firm," Journal of Public Economics, Elsevier, vol. 25(3), pages 329-369, December.
    9. James Hagerman, 1990. "Regulation by Price Adjustment," RAND Journal of Economics, The RAND Corporation, vol. 21(1), pages 72-82, Spring.
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    14. Koray, Semih & Saglam, Ismail, 2005. "Learning in Bayesian Regulation," MPRA Paper 1899, University Library of Munich, Germany.
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    Citations

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    Cited by:

    1. Gustavo Ferro & Omar O. Chisari, 2010. "Tópicos de Economía de la Regulación de los Servicios Públicos," Working Papers hal-00473038, HAL.
    2. M. Remzi Sanver, 2022. "Well-designed incentive schemes: introduction to the special issue in honor of Semih Koray," Review of Economic Design, Springer;Society for Economic Design, vol. 26(3), pages 247-254, September.
    3. Flavio M. Menezes & Christian Roessler, 2010. "Good and Bad Consistency in Regulatory Decisions," The Economic Record, The Economic Society of Australia, vol. 86(275), pages 504-516, December.
    4. Ismail Saglam, 2017. "Monopoly Regulation Under Relaxed Pareto Efficiency," Studies in Microeconomics, , vol. 5(2), pages 162-176, December.
    5. repec:cte:werepe:we081207 is not listed on IDEAS
    6. repec:ebl:ecbull:v:3:y:2007:i:12:p:1-10 is not listed on IDEAS
    7. Ismail Saglam & Semih Koray, 2007. "Learning in Bayesian regulation: desirable or undesirable?," Economics Bulletin, AccessEcon, vol. 3(12), pages 1-10.
    8. Saglam, Ismail, 2014. "Research and Development of an Optimally Regulated Monopolist with Unknown Costs," MPRA Paper 60245, University Library of Munich, Germany.
    9. Hesamzadeh, M.R. & Rosellón, J. & Gabriel, S.A. & Vogelsang, I., 2018. "A simple regulatory incentive mechanism applied to electricity transmission pricing and investment," Energy Economics, Elsevier, vol. 75(C), pages 423-439.
    10. Ingo Vogelsang, 2006. "Electricity Transmission Pricing and Performance-based Regulation," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 97-126.
    11. Ismail Saglam, 2016. "On the Pareto Efficiency of a Socially Optimal Mechanism for Monopoly Regulation," IPEK Working Papers 1601, Ipek University, Department of Economics, revised May 2016.
    12. Ismail Saglam, 2024. "The Bayesian approach to monopoly regulation after 40 years," Journal of Regulatory Economics, Springer, vol. 65(1), pages 108-136, June.
    13. Saglam, Ismail, 2022. "Pretend-But-Perform Regulation of a Duopoly under Three Competition Modes," MPRA Paper 116767, University Library of Munich, Germany.
    14. Ismail Saglam, 2022. "Bridging bargaining theory with the regulation of a natural monopoly," Review of Economic Design, Springer;Society for Economic Design, vol. 26(3), pages 307-344, September.
    15. Koray, Semih & Saglam, Ismail, 2005. "Learning in Bayesian Regulation," MPRA Paper 1899, University Library of Munich, Germany.

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