Regulatory Risk under Optimal Incentive Regulation
The paper provides a tractable, analytical framework to study regulatory risk under optimal incentive regulation. Regulatory risk is captured by uncertainty about the policy variables in the regulatorâ€™s objective function: weights attached to profits and costs of public funds. Results are as follows: 1) The regulatorâ€™s reaction to regulatory risk depends on the curvature of the aggregate demand function. 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) Consumersâ€™ risk preferences tend to contradict the firmâ€™s. 5) Benevolent regulators always prefer regulatory risk and these preferences may contradict both the firmâ€™s and consumersâ€™ preferences.
|Date of creation:||Jan 2009|
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