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Dynamic Firm Regulation with Endogenous Profit-Sharing

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Michele Moretto
Paola Valbonesi

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Abstract

To avoid the extremely high profit levels found in recent experiences with price cap regulation, some regulators have applied a profit-sharing (PS) rule that revises prices to the benefit of consumers. This paper investigates the conditions under which a regulator can implement such a PS scheme, having contract closure as outside option if the firm's profits are excessive. We determine both the level of profits that triggers the PS and the consequent price adjustment endogenously. We then explore the PS dynamic efficiency in the repeated regulator-firm relationship.

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Paper provided by University of Brescia, Department of Economics in its series Working Papers with number ubs0410.

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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.:
  1. Bawa, Vijay S & Sibley, David S, 1980. "Dynamic Behavior of a Firm Subject to Stochastic Regulatory Review," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 21(3), pages 627-42, October. [Downloadable!] (restricted)
  2. Lyon, Thomas P, 1996. "A Model of Sliding-Scale Regulation," Journal of Regulatory Economics, Springer, vol. 9(3), pages 227-47, May.
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  3. Simon, Leo K & Stinchcombe, Maxwell B, 1989. "Extensive Form Games in Continuous Time: Pure Strategies," Econometrica, Econometric Society, vol. 57(5), pages 1171-1214, September. [Downloadable!] (restricted)
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  4. Michele Moretto & Paolo Panteghini & Carlo Scarpa, 2003. "Investment Size and Firm's Value under Profit Sharing Regulation," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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  5. David J. Salant & Glenn A. Woroch, 1992. "Trigger Price Regulation," RAND Journal of Economics, The RAND Corporation, vol. 23(1), pages 29-51, Spring. [Downloadable!] (restricted)
  6. Steven Shavell & Kathryn Spier, 1996. "Threats without Binding Commitment," NBER Working Papers 5461, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  7. Sappington, David E. M. & Weisman, Dennis L., 1996. "Revenue sharing in incentive regulation plans," Information Economics and Policy, Elsevier, vol. 8(3), pages 229-248, September. [Downloadable!] (restricted)
  8. Klein, Daniel B. & O'Flaherty, Brendan, 1993. "A game-theoretic rendering of promises and threats," Journal of Economic Behavior & Organization, Elsevier, vol. 21(3), pages 295-314, August. [Downloadable!] (restricted)
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  9. David E.M. Sappington & David S. Sibley, 1992. "Strategic Nonlinear Pricing under Price-Cap Regulation," RAND Journal of Economics, The RAND Corporation, vol. 23(1), pages 1-19, Spring. [Downloadable!] (restricted)
  10. Harrison, J. Michael & Kreps, David M., 1979. "Martingales and arbitrage in multiperiod securities markets," Journal of Economic Theory, Elsevier, vol. 20(3), pages 381-408, June. [Downloadable!] (restricted)
  11. McDonald, Robert & Siegel, Daniel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, MIT Press, vol. 101(4), pages 707-27, November. [Downloadable!] (restricted)
  12. Crew, Michael A & Kleindorfer, Paul R, 1996. "Incentive Regulation in the United Kingdom and the United States: Some Lessons," Journal of Regulatory Economics, Springer, vol. 9(3), pages 211-25, May.
  13. Logan, John W & Masson, Robert T & Reynolds, Robert J, 1989. "Efficient Regulation with Little Information: Reality in the Limit?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 30(4), pages 851-61, November. [Downloadable!] (restricted)
  14. Richard J. Gilbert & David M. Newbery, 1994. "The Dynamic Efficiency of Regulatory Constitutions," RAND Journal of Economics, The RAND Corporation, vol. 25(4), pages 538-554, Winter. [Downloadable!] (restricted)
  15. Mark Armstrong & Simon Cowan & John Vickers, 1994. "Regulatory Reform: Economic Analysis and British Experience," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262510790.
  16. Bergin, James & MacLeod, W Bentley, 1993. "Continuous Time Repeated Games," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 34(1), pages 21-37, February. [Downloadable!] (restricted)
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  1. Roberto Casarin & Carmine Trecroci, 2006. "Business Cycle and Stock Market Volatility: A Particle Filter Approach," Working Papers ubs0603, University of Brescia, Department of Economics. [Downloadable!]
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