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The Dynamic Efficiency of Regulatory Constitutions

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  • Richard J. Gilbert
  • David M. Newbery

Abstract

In this article, we model regulation as a repeated game between a utility facing a random sequence of demands and a regulator tempted to underreward past investment. Rate-of-return regulation designed with a constitutional commitment to an adequate rate of return on capital prudently invested is able to support an efficient investment program as a subgame-perfect Nash equilibrium for a larger set of parameter values than rate-of-return regulation without such a commitment. Furthermore, rate-of-return regulation is superior to price regulation according to the same criterion, assuming that the regulator is unable to make state-contingent transfer payments.

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Bibliographic Info

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

Volume (Year): 25 (1994)
Issue (Month): 4 (Winter)
Pages: 538-554

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Handle: RePEc:rje:randje:v:25:y:1994:i:winter:p:538-554

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Cited by:
  1. Dino Falaschetti, 2004. "Can Voting Reduce Welfare? Evidence from the US Telecommunications Sector," Public Economics, EconWPA 0401006, EconWPA.
  2. Margaret S. McMillan & William A. Masters, 2000. "Africa's Growth Trap: A Political-Economy Model of Taxation, R&D and Investment," CID Working Papers, Center for International Development at Harvard University 50, Center for International Development at Harvard University.
  3. Roland Strausz, 2009. "Regulatory Risk under Optimal Incentive Regulation," SFB 649 Discussion Papers, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany SFB649DP2009-006, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  4. Evangelinos, Christos, 2013. "Infrastrukturpreise: Eine normativ-theoretische Analyse," Discussion Papers, Dresden University of Technology, Faculty of Transportation and Traffic Sciences "Friedrich List", Institute for Transport and Economics 1/2013, Dresden University of Technology, Faculty of Transportation and Traffic Sciences "Friedrich List", Institute for Transport and Economics.
  5. Dino Falaschetti, 2003. "Voter Turnout, Regulatory Commitment, and Capital Accumulation: Evidence from the US Telecommunications Sector," Microeconomics, EconWPA 0311002, EconWPA.
  6. 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, American Economic Association, vol. 47(3), pages 729-70, September.
  7. McMillan, Margaret S. & Masters, William A., 2000. "An African Growth Trap: Production Technology And The Time-Consistency Of Agricultural Taxation, R&D And Investment," Miscellaneous Papers, Agecon Search 11839, Agecon Search.
  8. Ingo Vogelsang, 2010. "Incentive Regulation, Investments and Technological Change," CESifo Working Paper Series, CESifo Group Munich 2964, CESifo Group Munich.
  9. Brennan, Timothy J., 2011. "Energy efficiency and renewables policies: Promoting efficiency or facilitating monopsony?," Energy Policy, Elsevier, Elsevier, vol. 39(7), pages 3954-3965, July.
  10. John McLaren, 2003. "Institutional Elements of Tax Design and Reform," World Bank Publications, The World Bank, number 15170, August.
  11. Dino Falaschetti, 2004. "Can Voting Reduce Welfare? Evidence from the US Telecommunications Sector," Public Economics, EconWPA 0401009, EconWPA.
  12. Willian A Masters and Margaret S McMillan, 2000. "Africa’s growth trap: a political-economy model of taxation, R&D and investment," Economics Series Working Papers, University of Oxford, Department of Economics WPS/2000-14, University of Oxford, Department of Economics.
  13. Wren-Lewis, Liam, 2013. "Commitment in utility regulation: A model of reputation and policy applications," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 89(C), pages 210-231.
  14. Ingo Vogelsang, 2006. "Electricity Transmission Pricing and Performance-based Regulation," The Energy Journal, International Association for Energy Economics, International Association for Energy Economics, vol. 0(Number 4), pages 97-126.
  15. Graeme Guthrie, 2006. "Regulating Infrastructure: The Impact on Risk and Investment," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 44(4), pages 925-972, December.

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