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Sequential-Equilibrium Investment by Regulated Firms

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  • David Besanko
  • Daniel F. Spulber

Abstract

We examine the investment decisions of regulated firms in a sequential-equilibrium model under asymmetric information. The regulator is unable to commit to a pricing policy, unlike mechanism-design models, but sets rates after observing the firm's investment. The information conveyed by the firm's investment level alleviates the underinvestment observed under full information with limited regulatory commitment. The equilibrium regulatory strategy can be characterized by a nonlinear rate-of-return schedule. A regulator announcing such a schedule would be able to make a credible commitment.

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Bibliographic Info

Article provided by The RAND Corporation in its journal RAND Journal of Economics.

Volume (Year): 23 (1992)
Issue (Month): 2 (Summer)
Pages: 153-170

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Handle: RePEc:rje:randje:v:23:y:1992:i:summer:p:153-170

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Cited by:
  1. Carlo Cambini & Laura Rondi, 2009. "Access Regulation, Financial Structure and Investment in Vertically Integrated Utilities: Evidence from EU Telecoms," EUI-RSCAS Working Papers 68, European University Institute (EUI), Robert Schuman Centre of Advanced Studies (RSCAS).
  2. 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.
  3. Lapan, Harvey E. & Melkonian, Tigran A., 2002. "Trade Policy Under Asymmetric Information," Staff General Research Papers 10026, Iowa State University, Department of Economics.
  4. Bos, Dieter, 1999. "Incomplete contracting and price regulation," Journal of Public Economics, Elsevier, vol. 73(3), pages 353-371, September.
  5. Spiegel, Yossef, 1997. "The choice of technology and capital structure under rate regulation," International Journal of Industrial Organization, Elsevier, vol. 15(2), pages 191-216, April.
  6. Eduardo Saavedra, . "Renegotiating Incomplete Contracts: Over and Under Investment of Concessioned Public Infrastructure," ILADES-Georgetown University Working Papers inv106, Ilades-Georgetown University, Universidad Alberto Hurtado/School of Economics and Bussines.
  7. Michiel Bijlsma & Roel van Elk, 2008. "Opportunistic competition law enforcement," CPB Discussion Paper 110, CPB Netherlands Bureau for Economic Policy Analysis.
  8. Knieps, Günter & Weiß, Hans-Jörg, 2008. "Regulatory agencies and regulatory risk," Discussion Papers 118 [rev.], University of Freiburg, Institute for Transport Economics and Regional Policy.

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