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Commitment in utility regulation: A model of reputation and policy applications

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  • Wren-Lewis, Liam

Abstract

This paper builds a dynamic model of utility regulation where a government cannot commit to a time-inconsistent policy of not expropriating investment. By allowing the government’s type to change over time, I explore how reputation concerns may generate partial commitment. Restricting attention to equilibria that are strongly renegotiation proof, I show that there is a unique perfect Bayesian equilibrium. This contains episodes of investment and good behaviour followed by periods of expropriation and non-investment. I then apply the model to consider how the power of the incentive scheme and decentralization may influence the properties of this equilibrium. In the case of the power of incentives, the model suggests that price-caps may worsen commitment in developing countries, but not in developed ones. Similarly, the model suggests that decentralisation is likely to have a significant effect on commitment, but that this effect will depend on the general ability of the government to commit. Overall, we conclude that the effect of such policies on commitment will be different across countries, depending on the institutional environment.

Suggested Citation

  • Wren-Lewis, Liam, 2013. "Commitment in utility regulation: A model of reputation and policy applications," Journal of Economic Behavior & Organization, Elsevier, vol. 89(C), pages 210-231.
  • Handle: RePEc:eee:jeborg:v:89:y:2013:i:c:p:210-231 DOI: 10.1016/j.jebo.2011.05.014
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    Cited by:

    1. Antonio Estache & Tomas Serebrisky & Liam Wren-Lewis, 2015. "Financing infrastructure in developing countries," Oxford Review of Economic Policy, Oxford University Press, vol. 31(3-4), pages 279-304.
    2. Wren-Lewis, Liam, 2014. "Utility regulation in Africa: How relevant is the British model?," Utilities Policy, Elsevier, vol. 31(C), pages 203-205.

    More about this item

    Keywords

    Reputation; Commitment; Regulation;

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L97 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Utilities: General

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