Regulation and Contracts for Utility Services: Substitutes or Complements?
London Business School Working Paper No. 54
35 Pages Posted: 29 Jul 2003
Date Written: May 2003
It is frequently suggested that regulation by contract can effectively substitute for regulation by a specialist regulatory agency for utility service industries. We examine these arguments and consider both legal aspects and the experience of the UK in the reliance on franchise contracts in the railway and electricity industries and in other utility service industries. We conjecture that regulation and contracts are complements for network industries rather than substitutes. The existence of a regulatory agency allows for better and simpler contracts, which are easier to monitor, enforce and revise. This is what would be expected from the theory of incomplete contracts. We demonstrate that UK historical experience is strongly consistent with this view.
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