Efficiency versus measurement cost: Institutional diversity in network industries

Resumo

This paper explains the diversity in the institutional designs that coordinate network industries by analyzing the economic rationale of the design of rules to use the networks. We identify the network as a common-pool resource, and point at the definition of property rights as the elementary decision in the design of rules. It requires choosing what network characteristics need to be measured by market participants. We show that the institutional diversity is explained by the rationale behind that choice. The benefits of defining property rights come in terms of efficiency: the improvement in the coordination of participants’ information on the value of networks. The costs are associated with measuring network characteristics. When costs are higher than benefits for a certain network service, markets are no longer an adequate way to coordinate its allocation. In addition, when participants are heterogeneous, the benefits of measuring are high.