AbstractWe examine regulation as a repeated game between a regulator and a utility facing a Markovian sequence of demands. Sunk capital would be expropriated by a regulator concerned only with the short-run interests of consumers. There exist rate of return regulatory policies supporting efficient investment paths with zero expected profits as subgame perfect Nash equilibria, but these policies must under-reward capital in some states of the world. Carefully designed nonlinear price regulation can improve on these equilibrium outcomes, although at higher consumer costs, and only if state-contingent transfers are feasible.
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Bibliographic InfoPaper provided by Department of Economics, Institute for Business and Economic Research, UC Berkeley in its series Department of Economics, Working Paper Series with number qt50s6h8c6.
Date of creation: 14 Jun 1988
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regulation; utilities; repeated game; Social and Behavioral Sciences;
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