Lobbies, delegation and the under-investment problem in regulation
AbstractA 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 âhold-upâ 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 âtypeâ 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 InfoArticle provided by Elsevier in its journal International Journal of Industrial Organization.
Volume (Year): 26 (2008)
Issue (Month): 1 (January)
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Web page: http://www.elsevier.com/locate/inca/505551
Other versions of this item:
- Joanne Evans & Paul Levine & Fransesc Trillas, 2006. "Lobbies, Delegation and the Under-investment Problem in Regulation," School of Economics Discussion Papers 2006, School of Economics, University of Surrey.
- L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
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