Public firm incentives under asymmetric information and prospect of deregulation and privatization

Governments dislike poorly performing public firms and often see deregulation and privatisation as a way to improve performance and social welfare. From a theoretical point of view poor performance may be due to information asymmetries between the informed public firm and the relatively uninformed regulator. The point of view in the paper is that the information asymmetries that makes the regulator unable to achieve first best during regulation, is also the cause of deregulation and privatization failure. The effect on public firm incentives from introducing deregulation as a consequence from choosing a specific regulation contract is analysed.