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Price Regulation and the Commitment Problem: Can Limited Capture be Beneficial?

Author

Listed:
  • Paul Levine

    (University of Surrey)

  • Neil Rickman

    (University of Surrey & CEPR)

  • Francesc Trillas

    (Universitat Autonoma de Barcelona)

Abstract

We consider two aspects of the commitment problem in price regulation with lobbying the ratchet effect and the hold-up problem. We set out a dynamic model of price regulation with asymmetric information where the regulated firm can ‘buy influence’ in a lobbying equilibrium. Firms can sink non-contractible, cost-reducing investment but regulators cannot commit to future price levels. We fully characterize the perfect Bayesian equilibrium and show that the lobbying equilibrium can both ameliorate the ratchet effect and improve investment incentives by credibly offering the firm future rent. Simulations indicate significant welfare gains are possible from these two effects and that a range of lobbying outcomes can achieve this result.

Suggested Citation

  • Paul Levine & Neil Rickman & Francesc Trillas, 2006. "Price Regulation and the Commitment Problem: Can Limited Capture be Beneficial?," School of Economics Discussion Papers 0106, School of Economics, University of Surrey.
  • Handle: RePEc:sur:surrec:0106
    as

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    File URL: https://repec.som.surrey.ac.uk/2006/DP01-06.pdf
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    References listed on IDEAS

    as
    1. de Figueiredo, Rui J P, Jr & Spiller, Pablo T & Urbiztondo, Santiago, 1999. "An Informational Perspective on Administrative Procedures," Journal of Law, Economics, and Organization, Oxford University Press, vol. 15(1), pages 283-305, April.
    2. Faure-Grimaud, Antoine & Martimort, David, 2003. " Regulatory Inertia," RAND Journal of Economics, The RAND Corporation, vol. 34(3), pages 413-437, Autumn.
    3. Levine, Paul L & Rickman, Neil, 2002. "Price Regulation, Investment and the Commitment Problem," CEPR Discussion Papers 3200, C.E.P.R. Discussion Papers.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Joanne Evans & Paul Levine & Neil Rickman & Francesc Trillas, 2011. "Delegation to Independent Regulators and the Ratchet Effect," School of Economics Discussion Papers 0911, School of Economics, University of Surrey.

    More about this item

    Keywords

    price regulation; commitment problem; ratchet effect; under-investment;

    JEL classification:

    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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