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Price Regulation, Investment and the Commitment Problem

Author

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  • Paul Levine

    (University of Surrey and LBS)

  • Neil Rickman

    (University of Surrey and CEPR)

Abstract

We consider a dynamic model of price regulation with asymmetric information where strategic delegation is available to the regulator. Firms can sink non-contractible, cost-reducing investment but regulators cannot commit to future price levels. We fully characterise the perfect Bayesian equilibrium and show that, with incentive contracts and no delegation, under-investment occurs. We then show that delegation to a suitable regulator can both improve investment incentives and ameliorate the ratchet effect by credibly offering the firm future rent. Simulations indicate significant welfare gains from these two effects and that a wide range of regulatory preferences can achieve this result.

Suggested Citation

  • Paul Levine & Neil Rickman, 2003. "Price Regulation, Investment and the Commitment Problem," School of Economics Discussion Papers 0603, School of Economics, University of Surrey.
    • Handle: RePEc:sur:surrec:0603
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    File URL: https://repec.som.surrey.ac.uk/2003/DP06-03.pdf
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    References listed on IDEAS

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    1. Fershtman, Chaim & Judd, Kenneth L & Kalai, Ehud, 1991. "Observable Contracts: Strategic Delegation and Cooperation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 32(3), pages 551-559, August.
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    5. Currie, David & Levine, Paul L & Rickman, Neil, 1999. "Delegation and the Ratchet Effect: Should Regulators Be Pro-Industry?," CEPR Discussion Papers 2274, C.E.P.R. Discussion Papers.
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    Cited by:

    1. Brito Duarte & Pereira Pedro & Vareda João, 2013. "Investment, Dynamic Consistency and the Sectoral Regulator’s Objective," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 13(2), pages 563-594, August.
    2. Paul Levine & Neil Rickman & Francesc Trillas, 2006. "Price Regulation and the Commitment Problem: Can Limited Capture be Beneficial?," School of Economics Discussion Papers 0106, School of Economics, University of Surrey.
    3. Paul Levine & Paul Levine & Jon Stern & Francesc Trillas, 2003. "Independent Utility Regulators: Lessons from Monetary Policy," School of Economics Discussion Papers 0403, School of Economics, University of Surrey.
    4. Müller, Christine & Growitsch, Christian & Wissner, Matthias, 2010. "Regulierung und Investitionsanreize in der ökonomischen Theorie. IRIN Working Paper im Rahmen des Arbeitspakets: Smart Grid-gerechte Weiterentwicklung der Anreizregulierung," WIK Discussion Papers 349, WIK Wissenschaftliches Institut für Infrastruktur und Kommunikationsdienste GmbH.
    5. Evans, Joanne & Levine, Paul & Trillas, Francesc, 2008. "Lobbies, delegation and the under-investment problem in regulation," International Journal of Industrial Organization, Elsevier, vol. 26(1), pages 17-40, January.
    6. Maiorano, F. & Stern, J., 2007. "Institutions and investment in low and middle-income countries: the case of mobile communications," Working Papers 07/06, Department of Economics, City University London.
    7. Maiorano, Federica & Stern, Jon, 2007. "Institutions and telecommunications infrastructure in low and middle-income countries: The case of mobile telephony," Utilities Policy, Elsevier, vol. 15(3), pages 165-181, September.
    8. Antonio Estache & L. Wren-Lewis, 2008. "Towards a Theory of Regulation for Developing Countries: Following Laffont's Lead," Working Papers ECARES 2008_018, ULB -- Universite Libre de Bruxelles.

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    More about this item

    Keywords

    under-investment; commitment; price regulation;
    All these keywords.

    JEL classification:

    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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