IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Price Regulation, Investment and the Commitment Problem

  • Paul Levine

    (University of Surrey and LBS)

  • Neil Rickman

    (University of Surrey and CEPR)

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 characterise the perfect Bayesian equilibrium and show that, with incentive contracts and no delegation, under-investment occurs. 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.

File URL: http://www.fahs.surrey.ac.uk/economics/discussion_papers/2003/DP06-03.pdf
Download Restriction: no

Paper provided by School of Economics, University of Surrey in its series School of Economics Discussion Papers with number 0603.

as
in new window

Length: 35 pages
Date of creation: May 2003
Date of revision:
Handle: RePEc:sur:surrec:0603
Contact details of provider: Postal: Guildford, Surrey GU2 5XH
Phone: (01483) 259380
Fax: (01483) 259548
Web page: http://www.surrey.ac.uk/economics/
Email:


More information through EDIRC

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.:

as in new window
  1. 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.
  2. 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 763-74, November.
  3. 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 551-59, August.
  4. Lyon, Thomas P, 1995. "Regulatory Hindsight Review and Innovation by Electric Utilities," Journal of Regulatory Economics, Springer, vol. 7(3), pages 233-54, May.
  5. 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, June.
  6. 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.
  7. Urbiztondo, Santiago, 1994. "Investment without Regulatory Commitment: The Case of Elastic Demand," Journal of Regulatory Economics, Springer, vol. 6(1), pages 87-96, February.
  8. Fershtman, Chaim & Gneezy, Uri, 2001. "Strategic Delegation: An Experiment," RAND Journal of Economics, The RAND Corporation, vol. 32(2), pages 352-68, Summer.
  9. 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.
  10. Walsh, Carl E, 1995. "Optimal Contracts for Central Bankers," American Economic Review, American Economic Association, vol. 85(1), pages 150-67, March.
  11. 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 126-54, March.
  12. Dalen, Dag Morten, 1995. "Efficiency-improving investment and the ratchet effect," European Economic Review, Elsevier, vol. 39(8), pages 1511-1522, October.
  13. David M. Newbery, 2002. "Privatization, Restructuring, and Regulation of Network Utilities," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262640481, June.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:sur:surrec:0603. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Alex Mandilaras)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.