F. Gasmi, J. J. Laffont and W. W. Sharkey

This paper relies on an engineering optimization model of the local telecommunication exchange network to calibrate the functions entering various regulatory mechanisms, from both traditional and modern (incentive) regulation, and evaluate their relative performance. The engineering process model is used to generate data, which are econometrically synthesized in a translog economic cost function. Using this estimated cost function and some empirical and institutional information on market and regulatory conditions, we then calibrate demand, social-surplus, and disutility-of-(cost-reducing)-effort functions. These functions, together with probability distributions reflecting the regulator’s beliefs about technology characteristics, allow us to quantitatively assess the social value of regulatory transfers and of good cost auditing procedures, the redistributive consequences of the various forms of regulation, and the sensitivity of their relative performance to the cost of public funds.