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Utility price regulation and time inconsistency: comparisons with monetary policy

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Author Info
Paul Levine
John Stern
Francesc Trillas

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Abstract

We examine the hold-up problem of price regulation and compare it with the monetary policy credibility problem. For both, reputational solutions are possible provided that the policymaker is sufficiently far-sighted, but the hold-up problem in regulation turns out to be more serious than the inflation bias problem in monetary policy. Even with far-sighted regulators, a reputational equilibrium with optimal investment is undermined if capital depreciates slowly and consumer demand increases slowly. These results make the Rogoff-delegation solution to the regulatory commitment problem especially attractive. The paper concludes with a short discussion linking these results to the empirical literature on utility regulatory regimes. Copyright 2005, Oxford University Press.

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File URL: http://hdl.handle.net/10.1093/oep/gpi021
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Publisher Info
Article provided by Oxford University Press in its journal Oxford Economic Papers.

Volume (Year): 57 (2005)
Issue (Month): 3 (July)
Pages: 447-478
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Handle: RePEc:oup:oxecpp:v:57:y:2005:i:3:p:447-478

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  1. Paolo Panteghini & Carlo Scarpa, 2008. "Political pressures and the credibility of regulation: can profit sharing mitigate regulatory risk?," International Review of Economics, Springer, vol. 55(3), pages 253-274, September. [Downloadable!] (restricted)
  2. Gual, Jordi & Trillas, Francesc, 2006. "Telecommunications policies: Measurement and determinants," IESE Research Papers D/630, IESE Business School. [Downloadable!]
  3. Flavio Menezes & Christian Roessler, 2008. "Good and Bad Consistency in Regulatory Decisions," Discussion Papers Series 376, School of Economics, University of Queensland, Australia. [Downloadable!]
  4. Federica Maiorano & Jon Stern, 2007. "Institutions and Infrastructure Investment in Low and Middle-Income Countries: The Case of Mobile Communications," City University Economics Discussion Papers 07/06, Department of Economics, City University, London. [Downloadable!]
  5. Francesc Trillas, 2008. "Regulatory federalism in network industries," Working Papers 2008/8, Institut d'Economia de Barcelona (IEB). [Downloadable!]
  6. Xeni Dassiou & Jon Stern, 2008. "Infrastructure Contracts: Trust and Institutional Updating," City University Economics Discussion Papers 08/06, Department of Economics, City University, London. [Downloadable!]
    Other versions:
  7. Joan Ramon Borrell & Juan Luis Jiménez, 2008. "The drivers of antitrust effectiveness," Hacienda Pública Española, IEF, vol. 185(2), pages 69-88, July. [Downloadable!]
  8. Paul Levine & Joseph Pearlman & Bo Yang, 2007. "The Credibility Problem Revisited: Thirty Years on from Kydland and Prescott," Department of Economics Discussion Papers 1807, Department of Economics, University of Surrey. [Downloadable!]
    Other versions:
  9. Jordi Gual & Francesc Trillas, 2006. "Telecommunications Policies: Measurement and Determinants," Review of Network Economics, Concept Economics, vol. 5(2), pages 249-272, June. [Downloadable!]
  10. Grischa Perino, 2008. "How Delegation Improves Commitment," Working Papers 0466, University of Heidelberg, Department of Economics, revised Jun 2008. [Downloadable!]
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