A new era of theoretical computer science addresses fundamental problems about auctions, networks, and human behavior.

http://www.maths.lse.ac.uk/Personal/stengel/TEXTE/agt-stengel.pdf

Algorithmic Game Theory

The paper emphasizes the use of accounting data in regulatory or procurement contracts when the supplier (1) has superior information about the cost of the project and (2) invests in cost reduction. The main result states that, under risk neutrality, the supplier announces an expected cost and is given an incentive contract linear in cost overruns. This (optimal) contract moves toward a fixed-price contract as the announced cost decreases. An investment choice is then introduced and the use of a rate-of-return regulation is studied.

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Using Cost Observation to Regulate Firms

In the typical regulatory scheme a franchised monopoly has little incentive to reduce costs. This article proposes a mechanism in which the price the regulatedfirm receives depends on the costs of identical firms. In equilibrium each firm chooses a socially efficient level of cost reduction. The mechanism generalizes to cover heterogeneous firms with observable differences. Medicare's prospective reimbursement of hospitals by using diagnostically related groups is a scheme very similar to the one outlined here.

A Theory of Yardstick Competition

This paper begins with a sketch of the New Institutional Economics, with special emphasis on the ‘institutional environment’ (North and others) and the ‘institutions of governance’ (Coase and others) Thereafter the paper mainly emphasizes the applications of transaction cost economics to the study of governance, the object being to effect an economizing alignment between transactions, which differ in their attributes, and governance structures (firms, markets, hybrids, bureaus), which differ in their cost and competence I raise a series of issues – phenomena of interest, describing human agents, describing firms, purposes served, scaling up – to which any would-be theory of the firm should be expected to speak and indicate how transaction cost economics responds to each I thereafter describe the mechanisms through which transaction cost economics is implemented and develop some of the core conceptual supports out of which it works Applications to public bureaus, strategic management, and intractable transactions are sketched

Transaction Cost Economics: How It Works; Where It is Headed

Modelling and forecasting the diffusion of innovation – A 25-year review

A well-planned electric transmission infrastructure is the foundation of a reliable and efficient power system, especially in the presence of large scale renewable generation. However, the current electricity market designs lack incentive mechanisms which can guarantee optimal transmission investments and ensure reliable integration of renewable generation such as wind. This paper first proposes a stochastic bilevel disjunctive program for optimal transmission investment based on the newly proposed theoretical H-R-G-V incentive mechanism. The upper level is a profit-maximization problem of an independent transmission company (Transco), while the lower level is a welfare maximization problem. The revenue of the Transco is bounded by a regulatory constraint set by the regulator in order to induce socially optimal investments. The application of the H-R-G-V mechanism allows the regulator to ensure social maximum transmission investments and helps to reduce transmission congestion and wind power spillage. The transmission investment under the H-R-G-V mechanism is modeled as a stochastic bilevel disjunctive program. To solve the developed mathematical model we first propose a series of linearization and reformulation techniques to recast the original model as a stochastic mixed integer linear problem (MILP). We exploit the disjunctive nature of the reformulated stochastic MILP model and further propose a Bean decomposition algorithm to efficiently solve the stochastic MILP model. The proposed decomposition algorithm is also modified and accelerated to improve the computational performance. The computational performance of our MILP modeling approach and modified and accelerated Bean decomposition algorithm is studied through several examples in detail. The simulation results confirm a promising performance of both the modeling approach and its solution algorithm.

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Transmission Network Investment Using Incentive Regulation: A Disjunctive Programming Approach

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Anatomy of an Insurance Class Action

With the use of a laboratory experiment, we show the effects of co-investments on coverage, competition and price collusion in regulated network industries. On the one hand, co-investments turn out not to be a significant driver of new infrastructure investments beyond the level achieved by access regulation and they seem to facilitate tacit price collusion. On the other hand, co-investments economize on infrastructure investment costs and necessitate communication, which partially offset the aforementioned effects. In fact, communication between the firms on their future coverage, especially outside co-investments, seems to have a positive effect on investments. However, the surprising message of the experiment is that tacit collusion happens under co-investment although there is no reason to believe that it should and although we made almost every effort to prevent it. Our results indicate that regulators should evaluate co-investments with scrutiny as there are definite drawbacks that must be considered.

Ingo Vogelsang

Papers

Transmission Network Investment Using Incentive Regulation: A Disjunctive Programming Approach

Anatomy of an Insurance Class Action

Co-investments and tacit collusion in regulated network industries: Experimental evidence

Telecommunications pricing: Synthesis of theory and practice

Telecommunications pricing: Telecommunications production, costs, and pricing