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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. Urbiztondo, Santiago, 1994. "Investment without Regulatory Commitment: The Case of Elastic Demand," Journal of Regulatory Economics, Springer, vol. 6(1), pages 87-96, February.
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  4. 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).
  5. 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. 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 729-70, September.
  2. 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.
  3. 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.
  4. Gasmi, Farid & Recuero Virto, Laura, 2009. "The Determinants and Impact of Telecommunications Reforms in Developing Countries," TSE Working Papers 09-092, Toulouse School of Economics (TSE).
  5. 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.
  6. Ingo Vogelsang, 2010. "Incentive Regulation, Investments and Technological Change," CESifo Working Paper Series 2964, CESifo Group Munich.
  7. 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.
  8. Antonio Estache & Liam Wren-Lewis, 2010. "What Anti-Corruption Policy Can Learn from Theories of Sector Regulation," Working Papers ECARES ECARES 2010-033, ULB -- Universite Libre de Bruxelles.
  9. Francesc Trillas, 2008. "Regulatory federalism in network industries," Working Papers 2008/8, Institut d'Economia de Barcelona (IEB).
  10. 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).
  11. 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.
  12. 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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