Learning by doing and dynamic regulation

Journal Article

From experience, regulated monopolists learn to employ cost-reducing innovations. We characterize the optimal regulation of an innovating monopolist with unknown costs. Regulatory policy is designed to minimize current costs of service while encouraging development of cost-saving innovations. We find that under optimal regulation, (i) innovation is encouraged by light-handed regulation allowing the monopolist to earn greater information rents while providing greater service, (ii) innovation occurs in the absence of long-term agreements when private information is recurring, and (iii) innovation is more rapid in a durable franchise, and the regulator prefers durable franchises for exploiting learning economies.

Full Text

Duke Authors

Cited Authors

  • Lewis, TR; Yildirim, H

Published Date

  • January 1, 2002

Published In

Volume / Issue

  • 33 / 1

Start / End Page

  • 22 - 36

International Standard Serial Number (ISSN)

  • 0741-6261

Digital Object Identifier (DOI)

  • 10.2307/2696373

Citation Source

  • Scopus