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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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  • Evans, Joanne & Levine, Paul & Trillas, Francesc, 2008. "Lobbies, delegation and the under-investment problem in regulation," International Journal of Industrial Organization, Elsevier, vol. 26(1), pages 17-40, January.
    • Handle: RePEc:eee:indorg:v:26:y:2008:i:1:p:17-40
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    Cited by:

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    2. Boggio, Margherita, 2011. "From Reluctant Privatization to Municipal Capitalism: an Overview on Ownership, Political Connections and Decentralization," MPRA Paper 46232, University Library of Munich, Germany.
    3. Ingo Vogelsang, 2012. "Incentive Regulation, Investments and Technological Change," Chapters, in: Gerald R. Faulhaber & Gary Madden & Jeffrey Petchey (ed.), Regulation and the Performance of Communication and Information Networks, chapter 4, Edward Elgar Publishing.
    4. 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.
    5. Emmanuelle Auriol & Antonio Estache & Liam Wren-Lewis, 2018. "Can Supranational Infrastructure Regulation Compensate for National Institutional Weaknesses?," Revue économique, Presses de Sciences-Po, vol. 69(6), pages 913-936.
    6. 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.
    7. Antonio Estache & Liam Wren-Lewis, 2009. "Toward a Theory of Regulation for Developing Countries: Following Jean-Jacques Laffont's Lead," Journal of Economic Literature, American Economic Association, vol. 47(3), pages 729-770, September.
    8. 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.
    9. Antonio Estache & Liam Wren-Lewis, 2012. "Supranational Infrastructure Regulation: Institutional Opportunities and Challenges," Working Papers ECARES ECARES 2012-025, ULB -- Universite Libre de Bruxelles.
    10. Francesc Trillas Jané, 2016. "Behavioral Regulatory Agencies," Working Papers wpdea1606, Department of Applied Economics at Universitat Autonoma of Barcelona.
    11. Tapas Kundu & Tore Nilssen, 2020. "Delegation of Regulation," Journal of Industrial Economics, Wiley Blackwell, vol. 68(3), pages 445-482, September.
    12. Antonio Estache & Liam Wren-Lewis, 2011. "Anti-Corruption Policy in Theories of Sector Regulation," Chapters, in: Susan Rose-Ackerman & Tina Søreide (ed.), International Handbook on the Economics of Corruption, Volume Two, chapter 9, Edward Elgar Publishing.
    13. Navio-Marco, J & Solorzano-Garcia, M & Urueña, A., 2015. "Language As Key Factor Of Long-Term Value Creation In Mergers And Acquisitions In The Telecommunications Sector," 26th European Regional ITS Conference, Madrid 2015 127170, International Telecommunications Society (ITS).
    14. 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.
    15. Trillas, Francesc, 2010. "Network industries and regulatory jurisdiction," IESE Research Papers D/859, IESE Business School.
    16. Francesc Trillas, 2008. "Regulatory federalism in network industries," Working Papers 2008/8, Institut d'Economia de Barcelona (IEB).
    17. Brito Duarte & Pereira Pedro & Vareda João, 2013. "Investment, Dynamic Consistency and the Sectoral Regulator’s Objective," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 13(2), pages 563-594, August.
    18. Pachis, Athanasios & Yannelis, Demetrius, 2013. "The relation between local loop unbundling and investment in fixed telephony," 24th European Regional ITS Conference, Florence 2013 88470, International Telecommunications Society (ITS).
    19. Francesc Trillas, 2008. "Regulatory federalism in network industries," Working Papers 2008/8, Institut d'Economia de Barcelona (IEB).
    20. Sarkar, Sudipto, 2015. "Price limits and corporate investment: The consumers' perspective," Economic Modelling, Elsevier, vol. 50(C), pages 168-178.
    21. 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.

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    JEL classification:

    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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