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Lobbies, Delegation and the Under-investment Problem in Regulation

  • Joanne Evans

    (University of Surrey)

  • Paul Levine

    (University of Surrey)

  • Fransesc Trillas

    (Universitat Autonoma de Barcelona)

A time-inconsistency problem in regulation often results in under-investment es- pecially where there are high sunk costs in network industries such as electricity, gas, telecommunications and water. This paper provides a new perspective on this ‘hold-up’ problem facing the price regulation of a firm with market power where full commitment to a price regime is not possible. We compare a political equilibrium based on a voting model with lobbying with a delegation equilibrium, where a gov- ernment can delegate to a particular ‘type’ of pro- or anti-industry regulator. Our analysis suggests two possible ways in which we may observe price regulation that en- courages socially optimal investment in the absence of externally imposed regulatory commitment: first, there is less than total transparency in which voters receive an optimal amount of information and second, the decisions on price are delegated to a sufficiently, but not excessively, pro-industry regulator.

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Paper provided by School of Economics, University of Surrey in its series School of Economics Discussion Papers with number 2006.

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Length: 38 pages
Date of creation: Aug 2006
Date of revision:
Publication status: Forthcoming in International Journal of Industrial Organization
Handle: RePEc:sur:surrec:2006
Contact details of provider: Postal: Guildford, Surrey GU2 5XH
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