Natural Monopoly Regulation in the Presence of Cost Misreporting

This paper explores the implications of asymmetric cost information within the context of a regulated natural monopoly. We provide a unifying framework for the analysis of "cost padding" and/or exaggeration, both of which we refer to simply as "misreporting of costs." We study the incentives embedded in the regulatory regime itself and show how simple comparative statics may be useful in detecting falsification of the cost report which the regulated firm submits to the regulator