We examine the design of incentive programs to motivate regulated utilities to supply both basic service (e.g., electricity supply, local telephone service) and service enhancements (e.g., energy-conservation services, improved clarity and speed of voice communication). The optimal regulatory programs are shown to vary greatly, depending upon the information available to the regulator. The price of the basic service may optimally be distorted above or below marginal cost to better motivate the supply of the service enhancement. Our policy prescriptions are compared with current programs and proposals to promote energy conservation.

We examine a firm's decision either to produce an essential input itself or to hire a subcontractor to produce the input. We focus on how this decision is affected by technological change in the industry. In general, cost-reducing technological change leads the firm to produce the input itself more often. The firm's calculus is shown to depend on whether the subcontractor's skills are idiosyncratic or transferable. In the latter case, technological progress can even be detrimental to the firm and to society as a whole.

In practice, contracts involve "standard terms" or "rules," allowing for variations only under "exceptional" circumstances. We develop a simple model in which optimal contracts display this feature, even in the absence of transactions costs. Rules arise when an agent has "countervailing incentives" to misrepresent private information. These incentives are created by endowing the agent with a critical factor of production ex ante. Applications in regulatory, labor, and legal settings are developed.

Optimal regulatory policy is derived in a setting where the firm has better knowledge of demand than the regulator. When marginal production costs increase with output, the regulator can induce the firm to use its private information entirely in the social interest. When marginal costs decline with output, however, the regulator is unable to derive any benefit from the firm's superior knowledge, and a single price is established that is invariant to demand.

This paper examines the existence of competitive equilibria in markets for exhaustible resources where there are initial economies of scale in either the extraction of the resource or the utilization of the resource as an input in production. In such instances, which are fairly common, we find that the classic Hotelling rule for competitive extraction does not apply, since competitive price equilibria generally do not exist. This is in marked contrast to static markets where the usual textbook example of firms with U-shaped average cost curves is not inconsistent with the existence of competitive equilibria. Furthermore, oligopolistic market equilibria in which resource firms act as Nash producers may also fail to exist when there are returns to scale in production.

The authors examine the optimal design of a risk-adjusted deposit insurance scheme when the regulator has less information than the bank about the inherent risk of the bank's assets (adverse selection) and when the regulator is unable to monitor the extent to which bank resources are being directed away from normal operations toward activities that lower asset quality (moral hazard). Under a socially optimal insurance scheme: (1) asset quality is below the first-best level, (2) higher-quality banks have larger asset bases and face lower capital adequacy requirements than lower-quality banks, and (3) the probability of failure is equated across banks.

How Liable Should a Lender Be? The Case of Judgment-Proof Firms and Environmental Risk: Comment by Tracy R. Lewis and David E. M. Sappington. Published in volume 91, issue 3, pages 724-730 of American Economic Review, June 2001

We examine how owners of productive resources (e.g., public enterprises or financial capital) optimally allocate their resources among wealth-constrained operators of unknown ability. Optimal allocations exhibit: (1) shared enterprise profit—the resource owner always shares the operator's profit; (2) dispersed enterprise ownership—resources are widely distributed among operators of varying ability; (3) limited benefits of competition—the owner may not benefit from increased competition for the resource; and, sometimes, (4) diluted incentives for the most capable—more capable operators receive smaller shares of the returns they generate. Implications for privatizations and venture capital arrangements are explored. (JEL D82, D44, D20)

The authors examine a firm's decision either to produce an essential input itself or to hire a subcontractor to produce the input. The authors focus on how this decision is affected by technological change in the industry. In general, cost-reducing technological change leads the firm to produce the input itself more often. The firm's calculus is shown to depend on whether the subcontractor's skills are idiosyncratic or transferable. In the latter case, technological progress can even be detrimental to the firm and to society as a whole. Copyright 1991 by American Economic Association.