Regulating a monopolist with limited funds (Q818524)

The authors analyze the problem of regulating a monopolist with unknown cost when the regulator has limited funds. When the funds are limited, the regulator has two instruments to limit the transfer: bunching the more efficient types and under-production. The optimal regulatory mechanism prescribes that the monopolist supplies a good of lower quantity and that the more efficient types produce the same quantity. These two distortions reduce the information rent and the quantity produced by the more efficient types.