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Universal Service Obligations in Developing Countries

Jean-Jacques Laffont & ZHANG Xin-zhu (1.Universite des Sciences Socials, Antole Place France, 31042 Toulouse Cedex, France; 2.Research Center for Regulation and Competition, Chinese Academy of Social Sciences, Beijing 100732)  
In this paper we develop a simple model in which the government has asymmetric information about a monopolistic firm's marginal cost of providing services in the rural area. In our model the optimal universal service policy is implemented by two regulatory instruments, i.e., pricing and network investment. We conduct our analysis under both discriminatory pricing and uniform pricing. We find that under discriminatory pricing, asymmetric information leads to a higher price and a smaller network for the rural area than those under full information. While it may indeed induce a lower price for the rural area under uniform pricing, it is achieved at a cost of smaller network. Our results show that the threat of collusion weakens the incentives given to the firm. An interesting finding is that both the firm and the interest group of taxpayers have incentives to collude with the supervisor under both pricing regimes. Indeed, the existence of this new interest group hardens the collusion proof-ness constraint for the supervisor and the firm. Moreover, the allocations are distorted even if the high-cost information is revealed by the supervisor to reduce the stake of collusion between the supervisor and the interest group of taxpayers.
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