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Lobbies, delegation and the under-investment problem in regulation

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  • Evans, Joanne
  • Levine, Paul
  • Trillas, Francesc

Abstract

A time-inconsistency problem in regulation often results in under-investment es- pecially where there are high sunk costs in network industries such as electricity, gas, telecommunications and water. This paper provides a new perspective on this ‘hold-up’ problem facing the price regulation of a firm with market power where full commitment to a price regime is not possible. We compare a political equilibrium based on a voting model with lobbying with a delegation equilibrium, where a gov- ernment can delegate to a particular ‘type’ of pro- or anti-industry regulator. Our analysis suggests two possible ways in which we may observe price regulation that en- courages socially optimal investment in the absence of externally imposed regulatory commitment: first, there is less than total transparency in which voters receive an optimal amount of information and second, the decisions on price are delegated to a sufficiently, but not excessively, pro-industry regulator.

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Bibliographic Info

Article provided by Elsevier in its journal International Journal of Industrial Organization.

Volume (Year): 26 (2008)
Issue (Month): 1 (January)
Pages: 17-40

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Handle: RePEc:eee:indorg:v:26:y:2008:i:1:p:17-40

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Web page: http://www.elsevier.com/locate/inca/505551

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References

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  1. Jordi Gual & Francesc Trillas, 2006. "Telecommunications Policies: Measurement and Determinants," Review of Network Economics, De Gruyter, vol. 5(2), pages 4.
  2. Jon Faust & Lars E.O. Svensson, 1998. "Transparency and credibility: monetary policy with unobservable goals," International Finance Discussion Papers 605, Board of Governors of the Federal Reserve System (U.S.).
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  8. Paul Levine & Neil Rickman, 2003. "Price Regulation, Investment and the Commitment Problem," School of Economics Discussion Papers 0603, School of Economics, University of Surrey.
  9. Tomaso Duso, 2001. "Lobbying and Regulation in a Political Economy: Evidence from the US Cellular Industry," CIG Working Papers FS IV 01-03, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG).
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  12. Stephen Coate & Timothy Besley, 2000. "Elected versus Appointed Regulators: Theory and Evidence," NBER Working Papers 7579, National Bureau of Economic Research, Inc.
  13. Randolph Sloof, 2000. "Interest Group Lobbying and the Delegation of Policy Authority," Economics and Politics, Wiley Blackwell, vol. 12(3), pages 247-274, November.
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Citations

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Cited by:
  1. Brito, Duarte & Pereira, Pedro & Vareda, João, 2011. "Investment, dynamic consistency and the sectoral regulator's obective," 8th Asia-Pacific Regional ITS Conference, Taipei 2011: Convergence in the Digital Age 52341, International Telecommunications Society (ITS).
  2. Gasmi, Farid & Recuero Virto, Laura, 2008. "The Determinants and Impact of Telecommunications Reform in Developping Countries," IDEI Working Papers 530, Institut d'Économie Industrielle (IDEI), Toulouse.
  3. Niklas Potrafke, 2010. "Does government ideology influence deregulation of product markets? Empirical evidence from OECD countries," Public Choice, Springer, vol. 143(1), pages 135-155, April.
  4. Francesc Trillas, 2008. "Regulatory federalism in network industries," Working Papers 2008/8, Institut d'Economia de Barcelona (IEB).
  5. Ingo Vogelsang, 2010. "Incentive Regulation, Investments and Technological Change," CESifo Working Paper Series 2964, CESifo Group Munich.
  6. Recuero Virto, Laura & Gasmi, Farid & Noumba Um, Paul, 2009. "The role of institutional design in the conduct of infrastructure industries reforms - An illustration through telecommunications in developing countries," MPRA Paper 12881, University Library of Munich, Germany.
  7. Estache, Antonio & Wren-Lewis, Liam, 2010. "What Anti-Corruption Policy Can Learn from Theories of Sector Regulation," CEPR Discussion Papers 8082, C.E.P.R. Discussion Papers.
  8. Recuero Virto, Laura & Gasmi, Farid & Noumba Um, Paul, 2008. "The Role of Institutional Design in the Conduct of Infrastructure Industry Reforms - An Illustration through Telecommunications in Developing Countries," MPRA Paper 28253, University Library of Munich, Germany, revised 2008.
  9. Joanne Evans & Paul Levine & Neil Rickman & Francesc Trillas, 2011. "Delegation to Independent Regulators and the Ratchet Effect," School of Economics Discussion Papers 0911, School of Economics, University of Surrey.
  10. Antonio Estache & L. Wren-Lewis, 2008. "Towards a Theory of Regulation for Developing Countries: Following Laffont's Lead," Working Papers ECARES 2008_018, ULB -- Universite Libre de Bruxelles.

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