Price Regulation, Investment and the Commitment Problem
We consider a dynamic model of price regulation with asymmetric information where strategic delegation is available to the regulator. Firms can sink non- contractible, cost-reducing investment but regulators cannot commit to future price levels. We fully characterize the Perfect Bayesian equilibria and show that, with incentive contracts but without delegation, under- and over-investment can occur. We then show that delegation to a suitable regulator can both improve investment incentives and ameliorate the ratchet effect by credibly offering the firm future rent. Simulations indicate significant welfare gains from these two effects and that a wide range of regulatory preferences can achieve this result.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
|Date of creation:||Feb 2002|
|Contact details of provider:|| Postal: Centre for Economic Policy Research, 77 Bastwick Street, London EC1V 3PZ.|
Phone: 44 - 20 - 7183 8801
Fax: 44 - 20 - 7183 8820
|Order Information:|| Email: |
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- David M. Newbery, 2002. "Privatization, Restructuring, and Regulation of Network Utilities," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262640481, July.
- Lewis, Tracy R & Sappington, David E M, 1991.
"Oversight of Long-Term Investment by Short-Lived Regulators,"
International Economic Review,
Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 32(3), pages 579-600, August.
- Lewis, T.R. & Sappington, D.E.M., 1988. "Oversight Of Long-Term Investment By Short-Lived Regulators," Papers 325, California Davis - Institute of Governmental Affairs.
- Fershtman, Chaim & Judd, Kenneth L & Kalai, Ehud, 1991. "Observable Contracts: Strategic Delegation and Cooperation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 32(3), pages 551-559, August.
- Chaim Fershtman & Kenneth L. Judd & Ehud Kalai, 1990. "Observable Contracts: Strategic Delegation and Cooperation," Discussion Papers 879, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Fershtman, Chaim & Kalai, Ehud, 1997. "Unobserved Delegation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 38(4), pages 763-774, November.
- Chaim Fershtman & Ehud Kalai, 1993. "Unobserved Delegation," Discussion Papers 1043, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Fershtman, C. & Kalai, E., 1993. "Unobserved Delegation," Papers 10-93, Tel Aviv - the Sackler Institute of Economic Studies.
- Fershtman, Chaim & Gneezy, Uri, 2001. "Strategic Delegation: An Experiment," RAND Journal of Economics, The RAND Corporation, vol. 32(2), pages 352-368, Summer.
- Urbiztondo, Santiago, 1994. "Investment without Regulatory Commitment: The Case of Elastic Demand," Journal of Regulatory Economics, Springer, vol. 6(1), pages 87-96, February.
- Lyon, Thomas P, 1995. "Regulatory Hindsight Review and Innovation by Electric Utilities," Journal of Regulatory Economics, Springer, vol. 7(3), pages 233-254, May.
- Lyon, T.P., 1993. "Regulatory Hindsight Review and Innovation by Electric Utilities," Papers 93-013, Indiana - Center for Econometric Model Research.
- Spulber, Daniel F & Besanko, David, 1992. "Delegation, Commitment, and the Regulatory Mandate," Journal of Law, Economics and Organization, Oxford University Press, vol. 8(1), pages 126-154, March.
- Currie, David & Levine, Paul L & Rickman, Neil, 1999. "Delegation and the Ratchet Effect: Should Regulators Be Pro-Industry?," CEPR Discussion Papers 2274, C.E.P.R. Discussion Papers.
- Goodwin, Thomas H. & Patrick, Robert H., 1992. "Capital recovery for the regulated firm under certainty and regulatory uncertainty," Resources and Energy, Elsevier, vol. 14(4), pages 337-361, December.
- Mark Armstrong & Simon Cowan & John Vickers, 1994. "Regulatory Reform: Economic Analysis and British Experience," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262510790, July.
- Dalen, Dag Morten, 1995. "Efficiency-improving investment and the ratchet effect," European Economic Review, Elsevier, vol. 39(8), pages 1511-1522, October.
- Walsh, Carl E, 1995. "Optimal Contracts for Central Bankers," American Economic Review, American Economic Association, vol. 85(1), pages 150-167, March. Full references (including those not matched with items on IDEAS)