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Price Regulation and the Commitment Problem: Can Limited Capture be Beneficial?

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Author Info

  • Paul Levine

    (University of Surrey)

  • Neil Rickman

    (University of Surrey & CEPR)

  • Francesc Trillas

    (Universitat Autonoma de Barcelona)

Abstract

We consider two aspects of the commitment problem in price regulation with lobbying the ratchet effect and the hold-up problem. We set out a dynamic model of price regulation with asymmetric information where the regulated firm can ‘buy influence’ in a lobbying equilibrium. Firms can sink non-contractible, cost-reducing investment but regulators cannot commit to future price levels. We fully characterize the perfect Bayesian equilibrium and show that the lobbying equilibrium can both ameliorate the ratchet effect and improve investment incentives by credibly offering the firm future rent. Simulations indicate significant welfare gains are possible from these two effects and that a range of lobbying outcomes can achieve this result.

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File URL: http://www.fahs.surrey.ac.uk/economics/discussion_papers/2006/DP01-06.pdf
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Bibliographic Info

Paper provided by School of Economics, University of Surrey in its series School of Economics Discussion Papers with number 0106.

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Length: 35 pages
Date of creation: Feb 2006
Date of revision:
Handle: RePEc:sur:surrec:0106

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Web page: http://www.surrey.ac.uk/economics/
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Related research

Keywords: price regulation; commitment problem; ratchet effect; under-investment;

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References

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  1. Levine, Paul L & Rickman, Neil, 2002. "Price Regulation, Investment and the Commitment Problem," CEPR Discussion Papers 3200, C.E.P.R. Discussion Papers.
  2. de Figueiredo, Rui J P, Jr & Spiller, Pablo T & Urbiztondo, Santiago, 1999. "An Informational Perspective on Administrative Procedures," Journal of Law, Economics and Organization, Oxford University Press, vol. 15(1), pages 283-305, April.
  3. Faure-Grimaud, Antoine & Martimort, David, 2003. " Regulatory Inertia," RAND Journal of Economics, The RAND Corporation, vol. 34(3), pages 413-37, Autumn.
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Cited by:
  1. Joanne Evans & Paul Levine & Neil Rickman & Francesc Trillas, 2011. "Delegation to Independent Regulators and the Ratchet Effect," School of Economics Discussion Papers 0911, School of Economics, University of Surrey.

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