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Abstract:
A fully unbundled, regulated network fi
rm of unknown efficiency level can undertake unobservable effort to increase the likelihood of low downstream prices, e.g., by facilitating downstream competition. To incentivize such effort, the regulator can use an incentive scheme paying transfers to the
firm contingent on realized downstream prices. Alternatively, the regulator can propose to the
firm to sell the following forward contracts: the fi
rm pays the downstream price to the owners of a contract, but receives the expected value of the contracts when selling them to a competitive fi
nancial market. We compare the two regulatory tools with respect to regulatory capture: if the regulator can be bribed to suppress information on the underlying state of the world (the basic probability of high downstream prices, or the type of the firm), optimal regulation uses forward contracts only.
