Regulators gain power to control firms' hidden costs, improving public welfare.
Regulation in business involves a long-term relationship between a regulator and a company, which can be tricky due to one side having more information. A study looked at how a company's private cost information, which can change over time, affects pricing decisions when the regulator can commit to a policy for the entire regulatory period. The study found that the best pricing strategy depends on how much information the company shares in one period and how it will be used in the future.