Universal Service Obligations in LDCs

Abstract

This paper develops a simple model in which the government has asymmetric information about a monopolistic firm's marginal costs of providing an infrastructure service. The model is used to analyze the impact of asymmetric information and the threat of regulatory capture on optimal universal service policy in the public utilities of LDCs. The optimal universal service policy is implemented using 2 regulatory instruments: pricing and network investment. Under discriminatory pricing (between rural and urban areas), asymmetric information leads to a higher price and smaller network in the rural areas than under full information. Under uniform pricing, the price is lower but the size of the network is even smaller. Moreover, under both pricing regimes, taxpayers also have incentives to collude with the regulator. This hardens the coalition incentive constraint for the regulator and the firm.