Government Outsourcing: Contracting with Natural Monopoly (original) (raw)

Government Outsourcing: Public Contracting with Private Monopoly

The Economic Journal, 2009

The paper studies the impact of government budget constraint in a pure adverse selection problem of monopoly regulation. The government maximizes total surplus but incurs some cost of public fundsà la Laffont and Tirole (1993). An alternative to regulation is proposed in which Þrms are free to enter the market and to choose their price and output levels. However the government can contract ex-post with the private Þrms. This ex-post contracting setup allows more ßexibility than traditional regulation where governments commits to both investment and operation cash-ßows. This is especially relevant in case of high technological uncertainties.

Liberal Regulation: Privatization of Natural Monopolies with Adverse Selection

SSRN Electronic Journal, 2000

This paper studies the effect of soft-budget constraints in a pure adverse selection model of monopoly regulation. We consider a government maximizing total surplus but incurring some cost of public funds à la Laffont Tirole (1993). We propose a regulatory setup in which firms are free to enter natural monopoly markets and to choose their price and output levels as in the laisser-faire. In addition, the government proposes ex-post contracts to the private firms. We show that this regulatory setup allows governments to avoid refunding moneyloosing firms and that welfare is larger than under traditional regulation where governments commits to both investment and operation cash-flows.

Outsourcing and Competition Policy

Journal of Industry, Competition and Trade, 2011

We analyze optimal competition policy by a Competition Agency (CA) in a model with two countries, North and South, were a final good is produced by Northern oligopolistic firms using an input that can either be produced within the firm (vertical integration) or outsourced to Southern oligopolistic producers with lower labor costs (outsourcing). In the case where the final good is only consumed in the North, a CA in the South would optimally appropriate outsourcing rents through restrictions on the degree of competition among domestic firms. If the final good is consumed in both countries, we find that optimal competition policy in the South is marginally affected by the share of Southern consumption, leaving relatively important incentives to engage in rent-shifting. For a high enough share of Southern consumption, however, the interaction between the Northern and Southern CA is shown to be of the Prisoner’s Dilemma type, whereby the Nash equilibrium is Pareto-suboptimal and mutual cooperation on competition policy is globally desirable.

A model of monopoly with strategic government intervention

Journal of Public Economics, 1995

A formal model of firm-government interaction is developed in which the firm chooses the producer price and the government chooses the ad valorem tax rate to maximise revenue collection. This game is then embedded as the second stage of a two-stage game where, in stage 1, the firm gets to choose its technology and therefore its cost function. The main results of the paper are (i) to characterise the Nash and Stackelberg equilibria of the government-firm game (ii) to demonstrate that 'strategic' inefficiency, i.e. the choice of high-cost technologies when lower-cost options are available, is pervasive in these models whenever the government uses ad valorem taxes, and (iii) to show that, if the government's choice between ad valorem tax and specific or per-unit tax is endogenised, then in a perfect equilibrium the government will in fact choose the ad valorem system.

Strategic Trade Policy in the Presence of International Outsourcing in a Duopoly Model

Kinerja, 2017

This paper analyzes how domestic government sets its optimal export policy in a duopoly model when its domestic firm can only outsource its input while the rival firm is able to both produce and outsource its input. First we analyze the strategic outsourcing behavior of the foreign firm. We find that the foreign firm’s decisions on whether to outsource input or to make it by itself depend on the trade policy taken by the domestic government. The foreign firm will strategically outsource the entire quantity of its input production to the supplier with an input price higher than its in-house cost, if the domestic firm is subsidized by the domestic government. However, when the domestic firm is being charged a positive export tax by the domestic government, the foreign firm will decide to make input by itself despite the lower input price under the outsourcing regime. From the domestic government’s point of view, we find that the conditions for the foreign firm’s decisions correspond to the domestic social welfare maximization problem. When the foreign firm chooses to outsource its input to the supplier, the domestic government will impose a negative export tax on its firm, namely subsidy. While when the foreign firm chooses to make input by itself, the domestic government will impose an export tax on its firm as trade policy. Keywords: Trade Policy, Export Tax, Subsidy, Outsourcing

Regulation and Taxation of a Monopoly generating Externalities

2000

We consider a model with a monopolist that generates externalities. Externalities depend on either the volume of services provided X ,o r the number of clients N, or both. We study the socially optimal prices and propose a regulatory mechanism to decentralize the optimum allocation. We then compare the merits of this approach and of optimal taxation and discuss how

Regulation of a Monopoly Generating Externalities

2007

We consider a monopoly that generates externalities. These depend on either the volume of services provided, or the number of clients, or both. We study the socially optimal prices and propose a regulatory mechanism to decentralize the optimum allocation. The mechanism, which is an generalised version of the price-cap scheme, only requires standard accounting data and straightforward estimates of the social marginal costs/benefits of externalities.

Designing a private industry : Government auctions with endogenous market structure

Journal of Public Economics, 1994

This paper considers government mechanisms for auctioning production rights in which both the winners and the market structure, doupoly (dual-sourcing), monopoly (sole-sourcing), or government-owned production, are a function of the bids. In designing the optimal mechanism, the government considers the tradeoffs among consumer surplus, producer surplus, and revenue. Under incomplete information, doupoly is implemented less frequently, and government production more frequently, than under complete information. When bidders are symmetric, the optimal mechanism can be implemented as a modified second-price auction. Applications to privatization, deregulation, and defense procurement are discussed.

Public Monopoly, Mixed Oligopoly and Productive Efficiency

Australian Economic Papers, 2002

In general, the introduction of competition into the public sector seems to lead to higher costefficiency in service production. However, there are examples of substantial cost increases in some areas. In this paper, using a mixed oligopoly model, we investigate the effects of deregulation on the cost-reducing incentives of a public firm. Our results show that a firm that is a public monopoly has greater incentive to conduct cost-reducing investment than a public firm within mixed oligopoly market.