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Abstract:
This paper discusses the origins of the transaction costs in side-contracting. In Tirole (1986)'s model of collusion with a risk averse supervisor, the optimal collusion-proof contract trades-off coalitional incentives against an insurance motive. We characterize the corresponding agency cost and allocative distortions. Identifying this contractual outcome with Tirole (1992)'s model of collusion with exogenous transaction costs provides foundations for those transaction costs. Transaction costs of collusion are stake-dependent, linked to the economic environment and function of the colluding agents' degrees of risk preferences. We provide several applications of this theory of transaction costs for organizational design (vertical integration, design of supervisory structures and side-contracting under uncertainty).

Supervision, collusion, stake-dependent transaction costs

Abstract:
This paper derives an Equivalence Principle between organizational forms of supervisory and productive activities. We consider an organization with an agent privately informed on his productivity and a risk averse supervisor getting signals on the agent's type. In a centralized organization, the principal can communicate and contract with both the supervisor and the agent. However, these two agents can collude against the principal. In a decentralized organization, the principal only communicates and contracts with the supervisor who in turn sub-contracts with the agent. We show that the two organizations achieve the same outcome. We discuss this equivalence and provide various comparative statics results to assess the efficiency of supervisory structures.

Supervision, soft information, collusion, delegation.

Abstract:
We construct a regulation model in which renegotiation occurs due to the imperfect enforcement of concession contracts. This enables us to provide theoretical predictions for the impact, on the probability of renegotiation of a concession, of regulatory institutions, institutional features, economic shocks and of the characteristics of the concession contracts themselves. Then we use a data set of nearly 1000 concessions awarded in Latin America and the Caribbean countries from 1989 to 2000, covering the sectors of telecommunications, energy, transport and water, to test these predictions. Finally, we derive some policy implications of our theoretical and empirical work.

Renegotiation, Concession contracts, Regulation, LDCs

Abstract:
We develop a framework for Internet backbone competition. In the absence of direct payments between websites and consumers, the access charge allocates communication costs between websites and consumers and affects the volume of traffic. We analyze the impact of the access charge on competitive strategies in an unregulated retail environment. In a remarkably broad range of environments, operators set prices for their customers as if their customers' traffic were entirely off-net. We then compare the socially optimal access charge with the privately desirable one. Finally, when websites charge micropayments, or sell goods and services, the impact of the access charge on welfare is reduced; in particular, the access charge is neutral in a range of circumstances.

Abstract:
The paper develops a framework for Internet backbone competition. In the absence of direct payments between websites and consumers, the access charge allocates communication costs between websites and consumers and affects the volume of traffic. The paper analyzes the impact of the access charge on competitive strategies in an unregulated retail environment. In a remarkably broad range of environments, operators set prices for their customers as if their customers' traffic were entirely off-net. The paper then compares the socially optimal access charge with the privately desirable one. Finally, when websites charge micropayments, or when websites sell goods and services, the impact of the access charge on welfare is reduced; in particular, the access charge is neutral in a range of circumstances.

Internet, Networks, Interconnection, Competition Policy

Abstract:
In an environment with correlated returns, this paper characterizes optimal lending contracts when the bank faces adverse selection and borrowers have limited liability. Group lending contracts are shown to be dominated by revelation mechanisms which do not use the ex post observability of the partners' performances. However, when collusion between borrowers under complete information is allowed, group lending contracts are optimal in the class of simple revelation mechanisms (which elicit only the borrower's own private information) and remain useful with extended revelation mechanisms.

Group lending, adverse selection, collusion, development

Abstract:
We focus on adverse selection as a foundation of group lending. In a simple static model we show that there is no collateral effect if borrowers do not know each other. If the borrowers know each other, group lending implements efficient lending. However, it is not robust to collusive behavior, when transfers are allowed between colluding partners. Finally, we characterize the optimal collusion-proof group contract.

Abstract:
This paper extends the theory of network competition between telecommunications operators by allowing receivers to derive a surplus from receiving calls (call externality) and to affect the volume of communications by hanging up (receiver sovereignty). We investigate the extent to which receiver charges can lead to an internalization of the calling externality. When the receiver charge and the termination (access) charge are both regulated, there exists an efficient equilibrium. Efficiency requires a termination discount. When reception charges are market determined, it is optimal for each operator to set the prices for emission and reception at their off-net costs. For an appropriately chosen termination charge, the symmetric equilibrium is again efficient. Lastly, we show that network-based price discrimination creates strong incentives for connectivity breakdowns, even between equal networks.

Networks, interconnection, competition policy

Abstract:
Estache, Laffont, and Zhang develop a model to analyze the effects of asymmetric information on optimal universal service policy in the public utilities of developing countries. Optimal universal service policy is implemented using two regulatory instruments - pricing and network investment. Under discriminatory pricing, asymmetric information leads to a higher price and smaller network in the rural area than under full information. Under uniform pricing, the price is lower but the network is even smaller. In addition, under both pricing regimes, not only the firm but also taxpayers have incentives to collude with the regulator.

This paper - a product of the Office of the Vice President, Infrastructure Network - is part of a larger effort in the network to promote analytical work on emerging policy issues in infrastructure service delivery.

Abstract:
This paper develops a simple model in which the government has asymmetric information about a monopolistic firm's marginal costs of providing an infrastructure service. The model is used to analyze the impact of asymmetric information and the threat of regulatory capture on optimal universal service policy in the public utilities of LDCs. The optimal universal service policy is implemented using 2 regulatory instruments: pricing and network investment. Under discriminatory pricing (between rural and urban areas), asymmetric information leads to a higher price and smaller network in the rural areas than under full information. Under uniform pricing, the price is lower but the size of the network is even smaller. Moreover, under both pricing regimes, taxpayers also have incentives to collude with the regulator. This hardens the coalition incentive constraint for the regulator and the firm.

Universal Service Obligations (USO), Asymmetric information, regulation, collusion, regulatory capture

Abstract:
This paper complements the existing knowledge in the renegotiation literature on infrastructure concessions by analyzing government-led renegotiations. We first propose a multiple-period theoretical framework in which both Pareto improving and rent shifting renegotiations at the initiative of the government can occur. We then perform an empirical analysis based on a sample of 307 water and transport projects in five Latin American countries between 1989 and 2000. While some of the main insights from the previous literature are unchanged, for example concerning the importance of having a regulator in place when awarding concessions and the fragility of price cap regulatory schemes, there are also significant differences as predicted by the model, in particular with respect to the effect of investment and financing, as well as the corruption variables. We provide additional evidence showing that a good regulatory framework is especially important in contexts with weak governance and political opportunism.

Abstract:
This paper analyzes Cote d'Ivoire's experience with telecommunications liberalization and privatization. Cote d'Ivoire privatized its incumbent operator in 1997, and granted the newly privatized firm seven years of fixed-line exclusivity while introducing "managed competition" in the cellular market and free competition in value-added services (VAS). By March 2001, three cellular operators and a number of VAS providers had entered the market. Reform has thus significantly changed the landscape of Cote d'Ivoire's telecommunications sector and has brought with it tremendous improvement in sector performance. Between 1997 and 2001, fixed-line telephone penetration grew from 1.03 to 1.80 per hundred people, while mobile penetration skyrocketed from 0.26 to 4.46. But it is still too early to assess the validity of granting exclusivity to the incumbent operator. While penetration increased, the operator did not meet objectives regarding rural telephony and service quality. Moreover, fixed-line penetration increased in areas where the operator faced competition from mobile providers.

This paper - a product of Regulation and Competition Policy, Development Research Group - is part of a larger effort in the group to promote telecommunications competition, liberalization, and privatization in Africa.

Abstract:
We study the optimal mechanism for downsizing the public sector which takes into account different informational constraints (complete versus asymmetric information on each workers efficiency) and political constraints (mandatory versus voluntary downsizing). Under complete information, the optimal structure of downsizing (who is laid-off and who is not) does not depend on the political constraint and is determined by the (marginal) cost of retaining a worker in the public sector. Since this cost includes his opportunity cost in the private sector, information acquisition on opportunity costs affects the structure of downsizing. Under asymmetric information, the political constraints determine which workers obtain information rents and therefore affect the structure of downsizing. An increase in the precision of the information on workers opportunity costs may increase or decrease social welfare depending on its impacts on the information rents.

Abstract:
In modeling disequilibrium macroeconomic systems which one would want to subject to econometric estimation one typically faces the problem of whether the structural model can determine a unique equilibrium. The problem inherits a special form because the regimes in which the equilibria can lie are each linear. By placing restrictions on the parameters that insure the uniqueness of such a solution for each value of the exogenous and random variables, we can improve the estimation procedure. This paper provides necessary and sufficient conditions for uniqueness -- or "coherency." These conditions are applied to a variety of models that have been prominent in the literature on econometrics with `switching regimes` such as those of self-selectivity (Maddala), simultaneous equation tobit and probit (Amemiya, Schmidt) and multi-market macroeconomic disequilibrium (Gourieroux, Laffont and Nonfort).

Abstract:
The basic assumption of this paper is an attempt to be specific about price formation while retaining a fixed-price, quantity-constrained equilibration in the short-run. The second theme of this paper is the role of inventories in macrodynamics a topic of long-recognized importance, but one which has not received much attention within the disequilibrium literature. We will analyze how the level of inventories interacts with the level of prices and wages, and how the spillover effects in a fixed-price equilibrium produce certain testable characteristics in macro time series data. We will argue that these can be used to discriminate between a model of the type we study and the analogous flexible-price system. In section 2 we set out the basic model and discuss its assumptions. Section 3 derives the short-run quantity-constrained equilibrium as it depends on initial inventory stocks and on the random disturbances within the period. Section 4 presents, for comparison purposes, the analogous results under conditions of full price flexibility after these shocks are realized. Sections 5 and 6 are the heart of the paper. We first derive the probabilistic nature of the equilibrium as it depends upon the underlying stochastic disturbances. The probabilities of different types of quantity constrained equilibria can be compared. Then, we use these results to present the dynamics of inventory behavior and the statistical relationships between real wages, inventories and employment. We emphasize the possibility of using this type of analysis to test the disequilibrium hypothesis with anticipatory pricing, against the market-clearing assumptions.

Abstract:
We analyze the design of incentive mechanisms for the provision of transnational public goods under asymmetric information. Transnational public goods are infrastructures that no single country can afford to build for itself. We show that the external constraints imposed by this mechanism may affect consumption, pricing and the true redistributive concerns of local governments. We characterize the corresponding distortions. We also discuss the impact of the preferences for redistribution of the international agency in charge of designing the mechanism and the role of its ability to enforce that mechanism.

Transnational public goods, incentive mechanisms

Abstract:
Efficiency in the management of electricity transmission networks is essential for the success of the liberalized energy markets. The paper is dedicated to the short-run management problems of these natural monopolies. It analyses how to organize and price access to and use of the transport network. After presenting the technical and institutional features of the electricity industry, the paper develops the normative approach of first-best and second-best pricing by means of nodal prices. Then the exercise of market power at some nodes and its consequences for the transport system operator are examined. The remaining part is more policy oriented, describing and analysing the practical solutions implemented in the European Union for energy transport pricing. The paper concludes with some remarks about the enforcement of antitrust rules in electricity transport.

Abstract:
We show that the separation of powers in regulation may act as a commitment against the threat of regulatory capture. Splitting regulatory tasks and monitoring technologies among several non-benevolent regulators may reduce their discretion in engaging in socially wasteful activities. When regulators make collusive offers that are accepted by the agent whatever his characteristics, competition between regulators relaxes collusion-proofness constraints and improves social welfare. This result is robust to different specifications of the agent's preferences and to the timing of the game as long as one insists on safe side-contracting offers. We also discuss how separation affects both allocative efficiency and the distribution of rents in the economy.

Abstract:
This article makes some steps toward a formal political economy of environmental policy. Economists' quasi-unanimous preference for sophisticated incentive regulation is reconsidered. We recast the question of instrument choice in the general mechanism design literature within an incomplete contract approach to political economy. We show why "constitutional" constraints on the instruments of environmental policy may be desirable, even though they appear inefficient from a standard economic viewpoint. Their justification lies in the limitations they impose on the politicians' ability to distribute rents. Insights are provided on the emergence of incentive mechanisms in environmental regulation.

Abstract:
We discuss the internal organization of the firm, arguing that the comparison between a centralized and a decentralized hierarchical organization should be cast in terms of the agency costs associated with the different side-contracting games that agents play in these organizations. In our model, with no limits on communication between the agents and the principal (complete contracting), collusion is not an issue in a centralized organization. Centralization always dominates (at least weakly) delegation. With limits on communication (incomplete contracting), collusion may have some bite under centralization. Limits on communication introduce an anonymity condition on the contract, creating a conflict between participation and coalition incentive constraints under centralization. By shifting the bargaining power in the side-contracting stage, delegation is non-anonymous and asymmetric by design. This conflict is then avoided or diminished depending on the exact timing of the delegation game.

Abstract:
Our companion article developed a clear conceptual framework of negotiated or regulated interconnection agreements between rival operators and studied competition between interconnected networks, under the assumption of non-discriminatory pricing. This article relaxes this assumption and allows networks to charge different prices for calls terminating on the subscriber's network and those terminating on a rival's network. This creates a price differential between services that are identical for the consumer and generates network externalities despite network interconnection. We show that in both the mature and entry phases of the industry, the nature of competition is substantially affected by such price discrimination.

Abstract:
We develop a model of unregulated competition between interconnected networks and analyze the mature and transition phases of the industry in this deregulated environment. Networks pay (negotiated or regulated) access charges to each other and compete in prices for customers. We show that a competitive equilibrium may fail to exist for large access charges or for large network substitutability and that freely negotiated access charges may prevent effective competition in the mature phase of the industry and erect barriers to entry in the transition toward competition. Last, we examine the meaning and impact of policies such as the efficient component pricing rule.