This paper considers the efficiency of a contestable natural monopoly if consumers are heterogeneous and the monopolist can differentiate prices imperfectly. With restricted entry, the standard result in this case is that the monopoly offers a menu of price-quantity combinations which leads to...

Using the concept of Inequity Aversion we derive in a Moral Hazard setting several results which differ from conventional contract theory. Our three key insights are: First, inequity aversion plays a crucial role in the design of optimal contracts. Second, there is a strong tendency towards...