"On The Relationship between Incentive Regulation for Public Utilities and their Firm Structures"

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The contributions made by the research project for two years, i.e., 1997 and 1998, are presented in the following two papers.1. "Strategic Labor Bargaining of Regulated Firms"This paper examines the characteristics of labor bargaining of firms under regulation, like public utilities. One usually explains the income distribution between managers and workers (or a labor union) within a firm in general, i.e., including regulated firms, in terms of the bargaining power they own in a labor bargaining. The analysis in this paper shows that the existence of a regulation can have an effect on the income distribution within a firm under the regulation. In particular, it is shown that the manager of a regulated firm can increase her gain at the cost of the gain the workers of the firm obtain, especially when a regulator take an opportunistic behavior to determine the level of regulated price without the complete information on the firm's cost (i.e., under an asymmetric information).2. "Monopoly … More Regulation with an Outside Subcontractor"(This paper stems from the two earlier drafts entitled "Efficient Bargaining in Vertical Trade under Monopoly Regulation" and "Efficient Bargaining in Subcontracts under Monopoly Regulation".)This paper examines the relationship between public utility regulation and subcontracts for facility plants or the purchase of intermediate goods in public utility industries. It discusses two problems ; desirable bargaining forms of a subcontract under the regulation and a possibility of delegation of a subcontract to a regulated firm.In the analysis of the first problem, two particular bargaining forms are compared : One is called an "efficient bargaining", while the other is called an "exclusive price-setting". It is shown that under an asymmetric information, an efficient bargaining of the subcontract can be better than the exclusive price-setting from the social-welfare point of view, even if the bargaining power of a regulator (or a regulated firm) is quite weak in an efficient bargaining. The reason comes from the fact that the efficient bargaining can reduce more informational rent that the regulated firm obtains through the public utility regulation. For the second problem, i.e., on the possibility of delegation of a subcontract, the analysis shows that a regulator prefers the delegation to a regulated firm, when (1)the public-utility project is large, or (2) the technology that a subcontractor uses for a production of intermediate goods is good. Less