Using Forward Contracts to Reduce Regulatory Capture
AbstractA fully unbundled, regulated network fi?rm of unknown efficiency level can undertake unobservable effort to increase the likelihood of low downstream prices, e.g., by facilitating downstream competition. To incentivize such effort, the regulator can use an incentive scheme paying transfers to the ?firm contingent on realized downstream prices. Alternatively, the regulator can propose to the ?firm to sell the following forward contracts: the fi?rm pays the downstream price to the owners of a contract, but receives the expected value of the contracts when selling them to a competitive fi?nancial market. We compare the two regulatory tools with respect to regulatory capture: if the regulator can be bribed to suppress information on the underlying state of the world (the basic probability of high downstream prices, or the type of the firm), optimal regulation uses forward contracts only.
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Bibliographic InfoPaper provided by Max Planck Institute for Research on Collective Goods in its series Working Paper Series of the Max Planck Institute for Research on Collective Goods with number 2011_09.
Date of creation: May 2011
Date of revision:
Incentive regulation; regulatory capture; virtual power plants;
Other versions of this item:
- Höffler, Felix & Kranz, Sebastian, 2010. "Using Forward Contracts to Reduce Regulatory Capture," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 320, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
- K23 - Law and Economics - - Regulation and Business Law - - - Regulated Industries and Administrative Law
- L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
- L43 - Industrial Organization - - Antitrust Issues and Policies - - - Legal Monopolies and Regulation or Deregulation
- L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-07-27 (All new papers)
- NEP-BEC-2011-07-27 (Business Economics)
- NEP-COM-2011-07-27 (Industrial Competition)
- NEP-CTA-2011-07-27 (Contract Theory & Applications)
- NEP-ENE-2011-07-27 (Energy Economics)
- NEP-LAW-2011-07-27 (Law & Economics)
- NEP-REG-2011-07-27 (Regulation)
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