Price Regulation, Investment and the Commitment Problem
AbstractWe 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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Bibliographic InfoPaper provided by School of Economics, University of Surrey in its series School of Economics Discussion Papers with number 0603.
Length: 35 pages
Date of creation: May 2003
Date of revision:
under-investment; commitment; price regulation;
Other versions of this item:
- Levine, Paul L & Rickman, Neil, 2002. "Price Regulation, Investment and the Commitment Problem," CEPR Discussion Papers 3200, C.E.P.R. Discussion Papers.
- L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
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