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Uncertain regulatory timing and market dynamics

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  • Wilson, Nathan E.

Abstract

Using a dynamic model of capacity accumulation, I examine the relationship between uncertainty about the timing of a new Pigouvian tax and oligopolistic competition. I find that for some market structures uncertainty about the timing of the regulatory change leads firms to increase investment. These results stem from the nature of the uncertainty and its interaction with firms' strategic incentive to engage in capacity races. They dramatize the importance of accounting for initial conditions when forecasting firms' reactions to anticipated regulatory changes. In addition, I find that more protracted uncertainty leads to greater welfare costs.

Suggested Citation

  • Wilson, Nathan E., 2012. "Uncertain regulatory timing and market dynamics," International Journal of Industrial Organization, Elsevier, vol. 30(1), pages 102-115.
  • Handle: RePEc:eee:indorg:v:30:y:2012:i:1:p:102-115
    DOI: 10.1016/j.ijindorg.2011.07.001
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    Keywords

    Dynamic stochastic games; Regulatory uncertainty; Pigouvian tax; Capacity investment; Strategic interaction;

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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