In this paper, we study how a monopolistic firm with unknown costs may behave under the threat of regulation. To this aim, we integrate the self-regulation model of Glazer and McMillan (1992) with the optimal regulatory mechanism devised by Baron and Myerson (1982) for the case of asymmetric...

We study the effect of observability on the noncontractible investment of a regulated firm with private marginal cost information. We show that the observability reduces investment, pointing to the regulated firm's prevention of ratcheting. This result, which is in line with an earlier finding...