SCREENING IN SPACE: RICH AND POOR CONSUMERS IN A LINEAR CITY

Unlike standard models of monopolistic screening (second-degree price discrimination), we consider a situation where consumers are heterogeneous not only vertically, in their willingness to pay, but also horizontally, in their tastes or "addresses'' a la Hotelling's Linear City. For such a screening game, a novel model is composed. We formulate the game as an optimization program, prove the existence of equilibria, develop a method to calculate equilibria, and characterize their properties. Namely, the solution structure of the resulting menu of contracts can be either a "chain of envy'' like in usual screening or a number of disconnected chains. Unlike usual screening, "almost all'' consumers get positive informational rent. Importantly, the model can be extended to oligopoly screening.

Are Regulators Effective at Unraveling Accounting Manipulation? Evidence from Public Utility Commissions

Prior research proposes that a monopolist with private information inflates its reported costs under rate regulation to extract an informational rent. Using a sample of U.S. electric utilities from 1990–2011, we first confirm an unexpected increase in operating expense during rate review periods, then decompose operating expense into its cash and accrual components, and find the cash component accounts for 89% of this increase. The observed pattern is consistent with some combination of real activities management and utility managers misrepresenting transitory expense shocks as permanent. We then focus on identifying regulators’ effectiveness at unraveling this manipulation and minimizing the rent. We estimate that, on average, regulators allow 17¢ out of every dollar of abnormal cash expense to be recovered in future annual revenue, a statistically significant amount. Next, we study the effects of regulators’ ability (proxied by experience) and motivation (proxied by whether they were elected) to unravel accounting manipulation. We find that whereas inexperienced and politically appointed regulators allow a significant portion of abnormal cash expense to be recovered (41¢ and 24¢ out of every dollar, respectively), experienced and elected regulators do not (although the difference between appointed and elected regulators is not statistically significant). Our findings suggest that regulators differ in their ability to identify manipulation—with experience enhancing this ability—and that, on average, state regulators effectively unravel most of the effect of accounting manipulation. This paper was accepted by Suraj Srinivasan, accounting.

TECHNOLOGICAL FAILURE, ECONOMIC SUCCESS

A research lab has private information about failed test results. There is a finite group of potential participants in a patent race to whom this information is valuable, since it reduces research costs. The lab acts as a Stackelberg leader in a strategic game of informational rent extraction. The lab's optimum is also (constrained) socially optimal in that the lab sells all its information to all the firms. Posting a uniform per unit (per test result) price suffices to achieve that outcome.