Table of Contents

Regulation, Deregulation, Reregulation

Regulation, Deregulation, Reregulation

Institutional Perspectives

Advances in New Institutional Analysis series

Edited by Claude Ménard and Michel Ghertman

Building on Oliver Williamson’s original analysis, the contributors introduce new ideas, different perspectives and provide tools for better understanding changes in the approach to regulation, the reform of public utilities, and the complex problems of governance. They draw largely upon a transaction cost approach, highlighting the challenges faced by major economic sectors and identifying critical flaws in prevailing views on regulation. Deeply rooted in sector analysis, the book conveys a central message of new institutional economics: that theory should be continuously confronted by facts, and reformed or revolutionized accordingly.

Chapter 12: Information Asymmetries and Regulatory Rate-Making: Case Study Evidence from Commonwealth Edison and Duke Energy Rate Reviews

Adam Fremeth and Guy L.F. Holburn

Subjects: economics and finance, institutional economics

Extract

Adam Fremeth and Guy L. F. Holburn INTRODUCTION Since Baron and Myerson (1982) a large theoretical literature has explored the impact of asymmetric information on the design of optimal regulatory policies for natural monopolies (Armstrong and Sappington, 2007; Laffont and Tirole, 1993). A central insight from this research is that regulators who are uninformed about firm costs or market demand conditions can maximize social welfare by offering pricing structures that effectively pay informational rents to the firm. These induce the firm to truthfully reveal true costs or market demand. Subsequent models have built on Baron and Myerson by adopting alternative assumptions on dimensions such as the firm’s technology, regulatory policy instruments and commitment abilities. Despite these theoretical extensions, there has been little empirical assessment of the relationship between asymmetric information and regulated rates. In this chapter we conduct a qualitative investigation of the relationship between regulators’ knowledge of regulated firms and their policy decisions. While directly observing the extent of regulatory knowledge presents a measurement challenge for researchers, we instead identify mechanisms through which information about regulated entities is revealed to external parties, including regulators. We focus our attention on three types of mechanism: the first considers the development of tacit knowledge through a regulator’s prior experience in office in the task of administering regulatory policies; the second is the publication of codified knowledge about a firm in the form of other agency, or judicial, rules or orders. Greater first-hand regulatory experience and greater amounts of 268 Information asymmetries and...

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