Government contracting with monopoly in infrastructure provision: Regulation or deregulation?

Abstract

This study contributes to the body of knowledge by characterizing the optimal contracts for infrastructure provision that involve the choices of investment timing, price, quality, subsidy/tax, and franchise fee in regulation and deregulation regimes; and comparing the two regimes in terms of social welfare under demand uncertainty and information asymmetry. The results suggest that regulation under information symmetry dominates regulation under information asymmetry and deregulation. Whether deregulation dominates regulation under information asymmetry depends on the interplay of shadow cost of public funds, the demand volatility, the government’s imperfect information on the firm’s cost structure, and the franchise fee.