ABSTRACT
The purpose of this monograph is to review and interpret the literature that examines the design of regulatory policy when the regulator's knowledge of the relevant environment is limited. For the most part, we are concerned with natural monopoly settings. Thus, a regulator is appointed to exercise the discipline on the monopoly firm that competition might otherwise provide. If the regulator were perfectly informed about demand and cost conditions in the industry, his task would be relatively straightforward. The optimal regulatory policy when the regulator is perfectly informed about the environment in which the firm operates is well documented in the literature. (See, for example, [13] and [61].) In practice, however, regulators are not likely to be perfectly informed about technological and demand conditions in the industries they oversee. Thus, a question arises as to whether optimal regulatory policy differs significantly when the regulator's knowledge is limited. It turns out that this is the case, which is why we believe this monograph discusses an important line of research.
