The new theory of regulation has been reconsidering the contractual relationships between regulated utilities and regulators through the window of the theory of incentives and the principal-agent model for 30 years. While there is a general consensus on how optimal regulation should be dealt with from a theoretical point of view, the empirical literature seems to be divided between positive and normative analysis. On the one hand, many empirical studies have assumed that the actual regulatory regimes are optimally designed as specified by the new theory of regulation. On the other hand, other studies have explicitly argued that actual regulatory mechanisms do not use such optimal schemes. This lecture proposes an overview of this current debate.

References

Laffont, J.J. The new economics of regulation ten years after. Econometrica, Vol. 62 (1994), pp. 507-537.

Bajari, P., and Tadelis S. Incentives versus Transaction Costs: A Theory of Procurement Contracts. Rand Journal of Economics, Vol. 32 (2001), pp. 387-407.

Gagnepain, P, Ivaldi M. and D. Martimort. The renegotiation cost of public transport services contracts, CEPR Working Paper, 2010.