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Utility price regulation and time inconsistency: comparisons with monetary policy

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  • Paul Levine
  • John Stern
  • Francesc Trillas

Abstract

We examine the hold-up problem of price regulation and compare it with the monetary policy credibility problem. For both, reputational solutions are possible provided that the policymaker is sufficiently far-sighted, but the hold-up problem in regulation turns out to be more serious than the inflation bias problem in monetary policy. Even with far-sighted regulators, a reputational equilibrium with optimal investment is undermined if capital depreciates slowly and consumer demand increases slowly. These results make the Rogoff-delegation solution to the regulatory commitment problem especially attractive. The paper concludes with a short discussion linking these results to the empirical literature on utility regulatory regimes. Copyright 2005, Oxford University Press.

Suggested Citation

  • Paul Levine & John Stern & Francesc Trillas, 2005. "Utility price regulation and time inconsistency: comparisons with monetary policy," Oxford Economic Papers, Oxford University Press, vol. 57(3), pages 447-478, July.
  • Handle: RePEc:oup:oxecpp:v:57:y:2005:i:3:p:447-478
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