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.
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Find related papers by JEL classification: L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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 551-59, August.
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Other versions:
Fershtman, Chaim & Kalai, Ehud, 1997.
"Unobserved Delegation,"
International Economic Review,
Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 38(4), pages 763-74, November.
Other versions:
Fershtman, C. & Kalai, E., 1993.
"Unobserved Delegation,"
Papers
10-93, Tel Aviv - the Sackler Institute of Economic Studies.
Chaim Fershtman & Ehud Kalai, 1993.
"Unobserved Delegation,"
Discussion Papers
1043, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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