Sabotaging cost containment

We show that sabotage may be particularly profitable for a vertically-integrated provider (VIP) when its downstream rival can devote effort to reducing its operating costs. Demand-reducing sabotage limits the return the rival anticipates from its cost management activities, and thereby inhibits those activities. The resulting higher costs for the rival increase the VIP’s profit in settings where sabotage would not be profitable if the rival could not manage its operating costs. To limit sabotage by the VIP, the rival may find it profitable to intentionally diminish its ability to reduce its production costs. The diminished ability can produce Pareto gains.     

Explaining the Choice Among Regulatory Plans in the U.S. Telecommunications Industry

We investigate why different states in the United States choose different regulatory plans in their telecommunications industry. We present a simple theoretical model and an empirical analysis of the issue. We find that a state is more likely to replace rate-of-return regulation with incentive regulation when: (1) residential basic local service rates have historically been relatively high; (2) allowed earnings under rate-of-return regulation in the state have been either particularly high or particularly low; (3) the state's leaders tend to come from both major political parties, rather than from a single party; (4) the state's urban population is growing relatively rapidly; and (5) the bypass activity of competitors in the state is less pronounced.     

Incentives for sabotage in vertically related industries

We show that the incentives of a vertically integrated supplier to “sabotage” the activities of downstream rivals can vary with both the type of sabotage and the nature of downstream competition. Cost-increasing sabotage is typically profitable under both Cournot and Bertrand competition. In contrast, demand-reducing sabotage is often profitable under Cournot competition, but unprofitable under Bertrand competition. Incentives for sabotage can vary non-monotonically with the degree of product differentiation.      

Incentive Regulation and Telecommunications Service Quality

We examine the impact of incentive regulation—price regulation and earnings sharing regulation—on retail service quality in the U.S. telecommunications industry between 1991 and 2002. We find that incentive regulation is associated with significantly higher service quality on several dimensions (e.g., more rapid installation of new telephone service, fewer trouble reports, and increased customer satisfaction) but significantly lower quality on some dimensions (fewer installation commitments met and longer delays in resolving reported service problems)JEL Classification: L51, L96, L15We thank Michael Crew and two anonymous referees for helpful comments and suggestions. We are also grateful to Vanessa Cruz and Mircea Marcu for excellent research assistance.     

Toward a benchmark for optimal prudency policy

This paper presents a benchmark model of prudency policy. The incidence and the financial implications of optimal prudence reviews are examined in a stylized setting. In the environment considered, prudence reviews optimally occur following particularly unfavorable performance by the regulated firm, and they impose expected penalties on the firm. However, rewards as well as penalties from prudence reviews are generally optimal. Furthermore, the risk and expected penalties associated with prudence reviews decline as the regulator's ex ante assessment of the firm's activities becomes more favorable.We are grateful to the National Science Foundation for financial support, and to Sanford Berg, Eugene Brigham, Joel Demski, Carl Pechman, and two anonymous referees for very helpful comments.     

Designing Optional No-Fault Insurance Policies for Health Care Systems

Legislation to create optional no-fault insurance (ONFL) programs has recently been enacted in Florida and Virginia. ONFI programs provide compensation to patients when certain medical complications arise, provided the patient agrees not to sue the doctor for additional damages. The optimal design of ONFI programs is explored in this paper, focusing on the incentive effects of ONFI programs. The question of whether ONFI programs should be funded entirely by participating doctors, or whether social subsidies are optimal, is examined.     

Competition among Health Maintenance Organizations

We develop a model of competition among health maintenance organizations (HMOs) to analyze the effects of market power, scale economies, and asymmetric knowledge of health risk on market outcomes. We find that competition among HMOs may, but need not, ensure socially preferred outcomes. Market power or scale economies can sometimes admit socially preferred outcomes when they would otherwise not arise. Asymmetric knowledge of health risk may or may not be constraining. When it is constraining, a variety of patterns of incomplete health insurance can arise, along with excessive or insufficient treatment and preventive care for either high-risk or low-risk individuals.     

Precontractual information asymmetry between principal and agent: The Continuous Case

In the presence of precontractual information asymmetry between principal and risk-neutral agent, the optimal strategy for the principal will be to deliberately induce outcomes which are ex post Pareto inefficient, except under rare circumstances.     

Revisiting the line-of-business restrictions

The telecommunications industry has undergone significant changes since the divestiture of the Bell System. These changes, particularly in state and federal regulatory policy, have served to increase the social costs and decrease the social benefits of the line-of -business restrictions imposed by the Modification of the Final Judgement (MFJ). The increased costs and reduced benefits of the MFJ provide a strong case for their abolition.     

The Impact of State Incentive Regulation on the U.S. Telecommunications Industry

We examine the impact of state incentive regulation on network modernization, aggregate investment, revenue, cost, profit, and local service rates in the U.S. telecommunications industry between 1986 and 1999. We find evidence of greater network modernization under price cap regulation (PCR), earnings sharing regulation (ESR), and rate case moratoria (RCM) than under rate of return regulation (RORR). Costs are generally lower under RCM. Costs are also lower under ESR and PCR when local competition is sufficiently intense. Some local service rates for business customers are lower under PCR. Revenue, profit, aggregate investment, and residential local service rates do not vary systematically under incentive regulation relative to RORR.