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

Listed author(s):
  • Liam Wren-Lewis

    (ECARES - European Center for Advanced Research in Economics and Statistics - ULB - Université Libre de Bruxelles [Bruxelles])

This paper builds a dynamic model of utility regulation where a government cannot commit to a time-inconsistent policy ofnot expropriating investment. By allowing the government’s type to change over time, I explore how reputation concerns may generate partial commitent. 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.

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Paper provided by HAL in its series Post-Print with number halshs-01516947.

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Date of creation: 2013
Publication status: Published in Journal of Economic Behavior and Organization, Elsevier, 2013, pp.210-231
Handle: RePEc:hal:journl:halshs-01516947
Note: View the original document on HAL open archive server: https://halshs.archives-ouvertes.fr/halshs-01516947
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