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Hold-up Problem in Price Cap Regulation with Limited Ability of Commitment in High Inflation

Author

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  • Takuya Nakaizumi

    (Professor, Kanto Gakuin University, Yokohama-city, Japan)

Abstract

In this study, we examine the hold-up problem under price cap regulation in developing economies characterised by high inflation that have a limited ability to commit. The governments of developing countries are unable to modify the exact inflation rate. If high inflation is brought about by unexpected monetary expansion after the initial average price is fixed, the insufficient ability to show exact inflation causes a lack of commitment to adjust the initial fixed price to the modified price. The study’s findings show that those that have a limited ability to commit cause a hold-up problem if inflation is sufficiently high for a firm to stop production at the initial price, while the hold-up problem does not occur if inflation is lower and the initial fixed price generates a sufficient profit for the first-best investment for the firm.

Suggested Citation

  • Takuya Nakaizumi, 2016. "Hold-up Problem in Price Cap Regulation with Limited Ability of Commitment in High Inflation," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 55(4), pages 947-953.
    • Handle: RePEc:pid:journl:v:55:y:2016:i:4:p:947-953
    as

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    References listed on IDEAS

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    More about this item

    Keywords

    Price Cap Regulation; Hold-up Problem; Limited Ability of Commitment; Inflation Adjustment;
    All these keywords.

    JEL classification:

    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • L43 - Industrial Organization - - Antitrust Issues and Policies - - - Legal Monopolies and Regulation or Deregulation
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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