Discussion Papers

Lorenz Nett

Das Problem unvollständiger Information für eine effiziente Regulierung
Nr. 213 / January 2001

Summary

Information plays a dominant role in the economics of regulation. In this paper we discuss the importance of information by considering various topics. We start by presenting incentive compatible mechanisms which are well known in the literature of economic theory. Yardstick competition for example is a prominent concept to induce regulated firms to reveal their true cost functions. We describe in which way this mechanism ideally leads to an efficient allocation. However, we also discuss the problems which occur if someone intends to apply this concept in practice. Meanwhile auctions are used to allocate property rights for the use of radio spectrum in various counries. Looking at a Vickrey auction we scrutinize as to why it is a dominant strategy for the participants of the auction to bid according to their willingness to pay. Thus it is ensured that those receive the right to use the frequencies who value them most.

There is a general wisdom that perfect information is a prerequisite for efficient regulation. We demonstrate that this is not true in general. By presenting the results of two only recently published papers we derive that there might be a value of being ignorant.

In the subsequent chapter we elucidate the information necessities to apply this well justified concepts. The Shapley-Value is a methodology to allocate common costs to various products. By presenting the Shapley concept in detail we show that in general it can only be applied in a qualitative sense. Price cap regulation is used to ensure low tariffs in so called bottleneck areas. In the economic literature it is often mentioned that this is a regulatory tool which can be applied quite easily. By looking at the German price cap regulation in telecommunications we can see that this is a myth because there is a need to generate a lot of information.

In the following chapter we discuss the following topics: Publication of information as a mean to induce welfare efficient behavior, transparency and communication of information as well as the topic how to organize a hearing process.

The model in the final chapter compares two institutional frameworks to ensure universal service provision, one is a direct cost compensation mechanism while universal service auction is another alternative. By analysing an adequate game theoretic model we prove that the allocation attached to universal service auction is worse in comparison to the other arrangement according to the measure of consumer and producer surplus. As an immediate consequence someone may conclude that only incomplete information might be a reason to apply universal auctions.

Only German language version available.

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