Laffont and Tirole's [Laffont, J., Tirole, J., 1986. Using cost observation to regulate firms. Journal of Political Economy 94, 614-641.] classic model of procurement under asymmetric information predicts that optimal contracts will always entail some cost sharing and that payments will be a...

We examine the optimal design of regulated input prices, accounting explicitly for their impact on incentives for process innovation. Optimal input prices are shown to vary both with the prevailing vertical industry structure and with the nature of downstream competition. The optimal input...

Regulated firms can be tempted to adopt cost-saving technologies, operating procedures, or capital structures without fully assessing the associated risks. We demonstrate how a regulator can costlessly preclude such behavior if she can impose substantial penalties on the firm in the event of...