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.

We explain how to award a monopoly franchise so as to maximize expected consumers' welfare. Potential producers initially possess imperfect private information about production cost. The franchise is awarded to the producer with the lowest expected costs, but prices exceed realized marginal costs. These ex post distortions foster more competitive bidding ex ante. The distortions for any bid-cost pair are invariant to the number of bidders (n), though expected distortions and profits decline with n.

[This article provides a link between two conflicting approaches to accounting theory. One approach focuses on "proper" income measurement or asset valuation. Under this approach, income is often viewed as economic income plus error, where the error arises from institutional constraints. The other approach focuses on information disclosure. According to this other approach, income is generally viewed as an informative random variable that assists in deriving, say, an economic valuation of the entity. The former approach tends to view the economic norm as a desideratum, thereby leaving the demand for accounting services outside of the formal theory. The latter approach tends to view the information content as a desideratum, thereby leaving most accounting structure outside of the formal theory. These two approaches are linked in this article by treating income measurement as a process by which useful information is conveyed, using the language of proper income measurement or asset valuation. Why this particular language is adopted is not addressed. Thus, the question of why one might select a particular measurement scale (e.g., Celsius) over some other scale (e.g., Fahrenheit) is not examined. Rather, the question asked is whether there is any loss of generality by confining the accounting system to income measurement techniques. The answer is no. The argument runs as follows. First, an exogenous stream of net cash flows and realizations of some (informative) random variable are postulated. Then, an accounting system is introduced. At periodic intervals, this system must compute the expected present value of the future net cash flows from (only) the realized net cash flow and random variable. The accounting system then reports the net cash flow and income (defined to be the sum of net cash flow and the change in expected present value) in each period. Finally, it is determined whether reporting net cash flows and income in this manner discloses fully the information contained in the original stream of net cash flows and realizations of the random variable. This may be the case. If not, a conservative accounting treatment can always be constructed that does disclose the information fully. Hence, the accounting apparatus, coupled with conservatism, provides the link between the two approaches to accounting theory. The information content of the accounting measure is ensured even when the measure is computed in a classical manner. A key feature of the argument is that "accounting value" and "economic value" may diverge. Paradoxically, this divergence may be essential to conveying the information. Therefore, it may not be correct to claim that inability to value particular resources or transactions is the important feature in defining the accounting domain.]

This paper demonstrates that input prices need not reflect the costs of an efficient incumbent supplier in order to induce entrants to implement efficient make-or-buy decisions. Because of strategic downstream considerations, entrants may always undertake efficient make-or-buy decisions, regardless of the prices at which they are authorized to buy key inputs from incumbent suppliers.

Sourcing, Make-or-Buy decisions, Product quality, Unverifiable information