he Regulatory Environment and Institutions
1.1 Regulatory Constraints
1.2 Regulatory lnstruments and Incentive Schemes
1.3 Simple versus Informationally Demanding Regulatory RuIe
1.4 Procurement versus Regulation

2 Commonly Used Incentive Schemes
;ç………..~ 2.1 Procurement Contracts
2.2 Regulatory Incentive Schemes in the Absence of Government Transfers

3 Received Theory and the Agenda for The New Regulatory Economics
3.1 Marginal Cost Pricing
3.2 Peak-Load Pricing
3.3 Marginal or Average Cost Pricing?
3.4 Balanced Budget and the Ra,nsey-Boiteux Model of Cost-of-Service Regulation
3.5 Input Choices
3.6 The Agenda of the New Regulatory Economics

4 Methodology and Overview of the Book
4.1 The Controlled Experiment
4.2 Overview of the Book
References

1 PRICE AND RATE-OF-RETURN REGULATION
1 COST-REIMBURSEMENT RULFS
1.1 Some Backgrounds
1.2 The Model
1.3 The Two-Type Case
1.4 Continuum of Types
1.4.1 Decentralization through a Menu of Linear Contracts
1.4.2 Parameters of the Incentive Scheme and Performance
1.4.3 Additive Note and Linear Contracts
1.4.4 The Two-Type Case and Nonlinearity of Optimal Contracts
1.4.5 Shutdown of the Firm
1.4.6 Compensation Caps and Cost Ceilings
The Main Economic ConcIusions
Implementation: Relevance and Informational
Requirement of Menus
Using Yardstick "Competilion" to Reduce Informational Asymmetries
1.8 Adding Investment to the Model
1.8.1 Contractible Investment
1.8.2 Noncontractible Investment
1.8.3 Private Information on the Desirability of
1.8.4 Investment: Rale of Return on Investment, Incentives, and the Averch-Johnson Model
1.9 Investment under Noncommitment
1.9.1 Reni Extraction Generating Underinvestment
1.9.2 Four Mechanisms Mitigating the Underinvestment
Effect
Mullipcnod Relationship under Commitment: False
Dynamics
Risk Aversion
Bibliographic Notes
Appendix’s
References

2 PRICING BY A SINGLE-PRODUCF FIRM WITH AND WITHOUT BUDGET BALANCE
Some Background
The Model
2.2.1 Description
2.2.2 Full Information
The Two.Type Case
Continuom of Types
Delegation of Pricing to the Firm
2.5.1 An Introduction to Price Taxes
2.5.2 Using Historical Data to Construct the Price Tax
Two-Part Tariffs in the Absence of Government Transfer
2.6.1The Optimal Two-Part Tariff
2.6.2 Optimal Cost-of-Service Regulation
Linear Pricing in the Absence of Government Transfer
2.7.1 Optimal Linear Prices as Sliding Seale Plan
2.7.2 Relationship to Monopoly Pricing and Price Caps
2.8 Concluding Remarks
Bibliographic Notes
References

3 PRICING AND INCENTIVES IN A MULTIPRODUCT FIRM
3.1 Some Background
3.2 Optimal Regulation
3.2.1 The Model
3.2.2 The Optimal Regulatory Allocation
3.2.3 Linearity of Cost-Reimbursement Rules
3.3 Third.Degree Peice Discrimination
3.3.1 Ramsey Pricing
3.3.2 Peak-Load Pricing
3.4 Second-Degree Price Discrimination
3.4.1 Fully Nonlinear Pricing
3.4.2 Two-Part Tariffs
3.5 Veriliable Quality
3.5.1 A Procurement Example
3.5.2 A Regulation Example
3.6 The Incentive-Pricing Dichotomy
3.6.1 Necessary and Sufficient Conditions
3.6.2 Example of Non dichotomy
3.6.3 The Incentive-Pricing Dichotomy in the Absence of Government Transfer
3.7 Multidimensional Effort and Characteristics
3.7.1 Effort Allocation: The Shared.Fixed-Cost Model
3.7.2 Multidimensional Type
3.7.3 Effort Allocation: The Shared-Marginal-Cost Model
3.8 Is Subcost Observation Useful?
3.8.1 One Dimensional Type
3.8.2 Multidimensional Type
3.9 General Equilibrium Analysis: Foundations of the Shadow Cost of Public Funds and Taxation by Regulation
3.9.1 Motivation
3.9.2 An Imperfect Income Taxation Model
3.10 Concluding Remarks
Bibliographic Notes
Appendix’s
References

4 REGULATION OF QUALITY
4.1 Some background
4.2 The Model with a Search Good
4.11 Incentives to Provide Quality
4.12 incentives for Quality and Cost Reduction
4.3 Optimal Regulation under Asymmetric Information
4.4 Implementation of the Optimal Regulatory Mechanism
4.5 Concern for Quality and the Power of Incentive Schemes
4.6 Reputation incentives for an Experience Good
4.7 Concluding Remarks
Bibliographic Notes
Appendixes
References

5 COMPETITIVE RAMSEY FORMULAS AND ACCESS PRICING
5.1 Some Background
5.2 Pricing and Competition
5.2.1 Regulated Competition
5.2.2 Unregulated Competitive Fnnge
5.2.3 Unregulated Competition with Distorted Pricing
5.3 Access Pricing: Pricing in the Absence of Incentive Correction
5.4 Access Pricing and Incentives
5.4.1 Common Network
5.4.2 Network Expansion
5.5 Concluding Remarks
Bibliographic Notes
Appendixes
References

6 BYPASS AND CREAM SKIMMING
6.1 Some background
6.2 The Model
6.3 Optimal Pricing Rules and Optimal Incentive Schemes
6.4 Bypass and Cream Skimming
6.5 Some Further Considerations about Bypass: Redistribution and Budget Constraint
6.6 Concluding Remarks
Bibliographic Notes
Appendixes
References

III BIDDING FOR NATURAL MONOPOLY

7 AUCTIONING INCENTIVE CONTRACIS
7.1 Some Background
7.2 The Model
7.3 The Optimal Bayesian Auction in the Two-Firm, Two-Type Case
7.4 The Optimal Bayesian Auction in the Continuum Case
7.4.1 The Firm's Bidding Behavior
7.4.2 The Optimal Auction
7.5 Implementation by a Dominant Strategy Auction
7.5.1 Reduction in Transfer
7.5.2 Equivalent Dominant Strategy Auction
7.5.3 On the Revelation Principle in an Auction
7.6 Optimality on Linear Contracts
7.7 Auctions in Regulation
7.8 Concluding Remarks
Bibliographic Notes
Appendixes
References

8 REPEATED AUCTIONS OF INCENTIVE CONTRACTS INVESTMENT, AND BIDDING PARITY
8.1 Some Background
8.2 The Model
8.3 Optimal Regulation under Asymmetric Information
8.4 Learning by Doing
8.5 Assessment of this Model
8.6 Transferable Investment
8.7 Concluding Remarks
Bibliographic Notes
Appendixes
References
THE DYNAM1S OF REGULATION

9 DYNAMICS WITHOUT COMMITMENT AND THE RATCHET EFFECT
9.1 Some Background
9.2 The Model
9.3 Ratcheting and Pooling in the Continuum Case
9.4 The Two-Type Case
9.4.1 Characterization of Finite First-Period Menus That Induce the Upper Sound on Welfare
9.4.2 Preliminary Analysis: Two-Contract Menus
9.4.3 Comparative Statics of the Optimal Contract as an Example
9.4.4 General Results
9.5 Concluding Remarks
Bibliographic Notes
Appendixes
References

10 COMMITMENT AND RENEGOTIATION
10.1 Some Background
10.2 The Model
10.2.1 The Commitment Framework
10.2.2 The Renegotiation Game
Renegotiation-Proof Second-Period Contracts
Characterization of the Optimal Contract
How Much Pooling?
Continuum of Types
Commitment, Renegotiation, and Nun commitment
Bibliographic Notes
Appendixes
References

V THE POLITICS OF REGULATION
11 REGULATORY CAPTURE
11.1 Some Background
11.2 The Model
11.2.1 The Fites
11.2.2 The Agency
11.2.3 Congress
11.2.4 Consumer Groups
11.3 Collusion-Free Regulation
11.3.1 Full Information
11.3.2 Asymmetric Information
11.4 Producer Protection
11.5 Multiple Interest Group
11.6 Shutdown of the Regulated Firm
11.7 A Political Theory of Cross-subsidization
11.8 Concluding Remarks
Bibliographic Notes
Appendixes
References

12 COST PADDING, ALJDITING, AND COLLUSION
12.1 Some Background
12.2 The Benchmark (No Cost Padding, No Auditing)
12.3 Audit of Cost Padding
12.3.1 Benevolent Audit o! Cost Padding
12.3.2 Collusion in Auditing
12.4 Monitoring o! Effort
12.4.1 Benevolent Monitoring o! Effort
12.4.2 Collusion in Monitoring o! Effort
Bibliographic Notes
Appendix
References

13 CARTELIZATION BY REGULATION
13.1 Some Background
13.2 The Model
13.3 Benevolent Agency and Incomplete Information about the incumbent's Technology
13.4 Cartelization
13.5 Pro and Anticompetition Agencies
13.5.1 Summary of the Argument
13.5.2 Agency.Entrant and Agency-Customer Collusion and Entry
Appendixes
References

14 AUCTION DESIGN AND FAVORITISM
14.1 Some Background
14.2 The Model
14.3 Optimal Auction with a Benevolent Agency
14.4 Collusion and Sofi Information
14.4.1 Description of Collusion
14.4.2 Soft Information
14.4.3 Indirect Bid Rigging
14.5 Asymmetric Collusion and Hard Information
14.6 Symmetric Collusion and Hard Information
14.7003 Concluding Remarks
Appendixes
References

VI REGULATORY INSTITUTIONS

15 REGULATORY INSTRUMENTS HEARINGS, AND INTEREST GROUP MONITORING
15.1 Welfare Foundations of Institutions
15.2 The Model
15.2.1 Components
15.2.2 Benevolent Agency Benchmark
15.2.3 Collusive Agency
15.3 The Solution
15.3.1 Average Cost Pricing
15.3.2 Marginal Cost Pricing
15.3.3 Optimal Institutions
15.3.4 Subsidies for Intervener Program
15.3.5 Alternative Technologies
15.3.6 Standards of Judicial Review
15.4 Choice of Watchdog
15.5 Concluding Remarks
Appendixes
References

16 COMMITMENT AND POLITICAL ACCOUNTABILITY
16.1 Some Background
16.2 Short-lived Regulators and the Optimal Constitution
16.2.1 The Model
16.2.2 Commitment
16.2.3 Noncommitment
16.2.4 Optimal Constitution
16.3 Short- lived Regulators and Complete Contracting
16.3.1 Investment Induced
16.3.2 No lnvestment
16.4 EIections Career Concrrns, and Commitment
16.4.1 Commitment Constitution
16.4.2 Noncommitment Constitution
16.4.3 Flexibility.on.Commitment Constitution
16.4.4 Campaign Contributions
16.5 Concluding Remarks
Bibliographic Notes
References

17 PRIVATIZATION AND INCENTIVES
17.1 Some Background
17.1.1 Public Enterprise, Private Regulated Firm, and Unregulated Firm
17.1.2 Conventional Wisdom about Privatizations
17.1.3 Residual Rights Considerations
17.2 The Model
17.2.1 Public Ownership
17.2.2 The Regulated Private Firm
17.3 Optimal Regulation with Public Ownership
17.4 Optimal Regulation of a Private Firm
17.4.1 Differentiable Equilibrium
17.4.2 Nondifferentiable Equilibria
17.5 Comparison of Ownership Structures
17.6 Concluding Remarks
Bibliographic Notes
Appendixes
References

CONCLUSION
REVIEW EXERCISES
INDEX