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Investment, Dynamic Consistency and the Sectoral Regulator’s Objective

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  • Brito Duarte

    (Departamento de Ciências Sociais Aplicadas, Faculdade de Ciências e Tecnologia, Universidade Nova de Lisboa, Caparica, Portugal; and CEFAGE-UE, Évora, Portugal)

  • Pereira Pedro
  • Vareda João

    (Autoridade da Concorrência, Lisboa, Portugal; and CEFAGE-UE, Évora, Portugal)

Abstract

This article explores the possibility of distorting the regulator’s objective function as a way of overcoming the dynamic consistency problem of regulatory policy toward investment. We derive general conditions under which having the legislator distort the regulator’s objective function away from social welfare allows increasing the range of parameter values for which it is possible to induce socially desirable investment. In particular, we show that when the regulator cannot commit to a regulatory policy, the legislator should give a relatively higher weight to the incumbent’s profit in the regulator’s objective function, if the incumbent invests, and a relatively higher weight to consumer surplus, if the incumbent does not invest.

Suggested Citation

  • 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.
    • Handle: RePEc:bpj:bejeap:v:13:y:2013:i:2:p:563-594:n:19
    DOI: 10.1515/bejeap-2013-0026
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    Cited by:

    1. Vogelsang Ingo, 2013. "The Endgame of Telecommunications Policy? A Survey," Review of Economics, De Gruyter, vol. 64(3), pages 193-270, December.

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    More about this item

    JEL classification:

    • L43 - Industrial Organization - - Antitrust Issues and Policies - - - Legal Monopolies and Regulation or Deregulation
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L96 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Telecommunications
    • L98 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Government Policy

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