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Regulatory Risk under Optimal Incentive Regulation

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  • Roland Strausz

Abstract

The paper provides a tractable, analytical framework to study regulatory risk. Regulatory risk is captured by uncertainty about the policy variables in the regulator’s objective function: weights attached to profits and costs of public funds. Results are as follows: 1) The regulator’s reaction to regulatory risk depends on the curvature of aggregate demand. 2) It yields a positive information rent effect exactly when demand is convex. 3) Firms benefit from regulatory risk exactly when demand is convex. 4) Consumers’ risk preferences tend to contradict the firm’s. 5) Benevolent regulators always prefer regulatory risk and these preferences may contradict both the firm’s and consumers’.

Suggested Citation

  • Roland Strausz, 2009. "Regulatory Risk under Optimal Incentive Regulation," CESifo Working Paper Series 2638, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_2638
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    File URL: http://www.cesifo-group.de/DocDL/cesifo1_wp2638.pdf
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    References listed on IDEAS

    as
    1. Paolo M. Panteghini & Carlo Scarpa, 2003. "Irreversible Investments and Regulatory Risk," CESifo Working Paper Series 934, CESifo Group Munich.
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    6. David J. Salant & Glenn A. Woroch, 1992. "Trigger Price Regulation," RAND Journal of Economics, The RAND Corporation, vol. 23(1), pages 29-51, Spring.
    7. Hayne E. Leland, 1968. "Saving and Uncertainty: The Precautionary Demand for Saving," The Quarterly Journal of Economics, Oxford University Press, vol. 82(3), pages 465-473.
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    More about this item

    Keywords

    optimal incentive regulation; regulatory risk; benevolent regulators; information rents;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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