Incomplete Information and Regulation : A Primer

This paper describes and contrasts the model of average cost regulation for natural monopolies under complete information with models under incomplete information such as Baron & Myerson's adverse selection model, and the procurement model of Laffont & Tirole with moral hazard. The basic set up follows the principal-agent framework for the two-type case, where the distortion caused by the informational rents are highlighted because the regulator does not know firm marginal cost or firm effective effort in reducing operative costs