(A) study on bayesian incentive regulatory schemes for optimal market structure

Abstract

The analyses of incentive-compatible regulatory policies have evoked considerable interest following Baron and Myerson``s basic model. In follow-up studies, Laffont and Tirole (1986) provide a framework for the analysis of incentive scheme with cost observability, which has been regarded so far as standard in this literature. Unfortunately, their framework which depends critically on outside taxation is not likely to work well in some circumstances. By adopting an incentive system with no taxes, we can derive optimal pricing and incentives from regulatory model under doubly asymmetric information. And besides to avoid the unnecessary interference of distortive tax mechanism, it is helpful to introduce the incentive system without taxes. That is, social cost of public funds arising from distortive taxation causes optimal nonlinear pricing rule to change. The purpose of this article is to analyze the effect of adopting the tax-free incentive scheme in monopoly and competitive markets. And, while contrasting our analysis with related works in the literature, we correct some flaws in them. Through our analysis, we also predicts a reverse case where a relatively efficient firm may be induced to accept competition.