IDEAS home Printed from https://ideas.repec.org/p/tin/wpaper/20130046.html
   My bibliography  Save this paper

Democracy and Regulation: The Effects of Electoral Competition on Infrastructure Investments

Author

Listed:
  • Arthur Schram

    (University of Amsterdam)

  • Aljaz Ule

    (University of Amsterdam)

Abstract

This paper investigates infrastructure investment in markets where regulation is subject to varying degrees of manipulation by elected politicians. Based on a model of price regulation in a market with increasing demand and long-term returns on investment we construct a multi-period game between a service provider, consumers with voting rights and elected decision makers. In each period the consumers elect a decision maker who may then regulate the price for service provision. Before an election the service provider chooses whether to increase its capacity. Investment is irreversible and profitable only with a sufficiently high price. We derive the subgame perfect equilibrium for this game and investigate the price and investment dynamics through an experiment with human subjects. The experimental results show that service providers invest when decision-makers' interests align with their own, though prices may rise inefficiently high when the regulatory framework is made independent of future political manipulation. Independency of regulation thus decreases efficiency and consumer surplus. In contrast, when decision-makers' interests do not align with service providers' we find efficiency only when regulation can be made independent from electoral dynamics.

Suggested Citation

  • Arthur Schram & Aljaz Ule, 2013. "Democracy and Regulation: The Effects of Electoral Competition on Infrastructure Investments," Tinbergen Institute Discussion Papers 13-046/I, Tinbergen Institute.
  • Handle: RePEc:tin:wpaper:20130046
    as

    Download full text from publisher

    File URL: https://papers.tinbergen.nl/13046.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Jordi Brandts & Paul Pezanis-Christou & Arthur Schram, 2008. "Competition with forward contracts: a laboratory analysis motivated by electricity market design," Economic Journal, Royal Economic Society, vol. 118(525), pages 192-214, January.
    2. repec:cto:journl:v:21:y:2002:i:3:p:515-544 is not listed on IDEAS
    3. Banks, Jeffrey S. & Duggan, John, 2006. "A General Bargaining Model of Legislative Policy-making," Quarterly Journal of Political Science, now publishers, vol. 1(1), pages 49-85, January.
    4. Ioannis N. Kessides, 2004. "Reforming Infrastructure : Privatization, Regulation, and Competition," World Bank Publications, The World Bank, number 13525, June.
    5. Carine Staropoli & Céline Jullien, 2006. "Using Laboratory Experiments To Design Efficient Market Institutions: The Case Of Wholesale Electricity Markets," Annals of Public and Cooperative Economics, Wiley Blackwell, vol. 77(4), pages 555-577, December.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Bastian Henze & Charles Noussair & Bert Willems, 2012. "Regulation of network infrastructure investments: an experimental evaluation," Journal of Regulatory Economics, Springer, vol. 42(1), pages 1-38, August.
    2. Jordi Brandts & Stanley S. Reynolds & Arthur Schram, 2014. "Pivotal Suppliers and Market Power in Experimental Supply Function Competition," Economic Journal, Royal Economic Society, vol. 124(579), pages 887-916, September.
    3. Christoph Engel & Klaus Heine, 2017. "The dark side of price cap regulation: a laboratory experiment," Public Choice, Springer, vol. 173(1), pages 217-240, October.
    4. Rodrigo M. S. Moita & Claudio Paiva, 2013. "Political Price Cycles in Regulated Industries: Theory and Evidence," American Economic Journal: Economic Policy, American Economic Association, vol. 5(1), pages 94-121, February.
    5. Seok-ju Cho & John Duggan, 2015. "A folk theorem for the one-dimensional spatial bargaining model," International Journal of Game Theory, Springer;Game Theory Society, vol. 44(4), pages 933-948, November.
    6. Anesi, Vincent & Duggan, John, 2018. "Existence and indeterminacy of markovian equilibria in dynamic bargaining games," Theoretical Economics, Econometric Society, vol. 13(2), May.
    7. Rassenti, Stephen & Kujal, Praveen & Ferreira, José Luis, 2009. "The strategic motive to sell forward: experimental evidence," UC3M Working papers. Economics we092616, Universidad Carlos III de Madrid. Departamento de Economía.
    8. de Groot Ruiz, Adrian & Ramer, Roald & Schram, Arthur, 2016. "Formal versus informal legislative bargaining," Games and Economic Behavior, Elsevier, vol. 96(C), pages 1-17.
    9. Holmberg, Pär & Willems, Bert, 2015. "Relaxing competition through speculation: Committing to a negative supply slope," Journal of Economic Theory, Elsevier, vol. 159(PA), pages 236-266.
    10. John Duggan & Tasos Kalandrakis, 2011. "A Newton collocation method for solving dynamic bargaining games," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 36(3), pages 611-650, April.
    11. Dorigoni, Susanna & Portatadino, Sergio, 2008. "LNG development across Europe: Infrastructural and regulatory analysis," Energy Policy, Elsevier, vol. 36(9), pages 3366-3373, September.
    12. Nunnari, Salvatore, 2018. "Dynamic Legislative Bargaining with Veto Power," CEPR Discussion Papers 12938, C.E.P.R. Discussion Papers.
    13. Kose,Ayhan & Ohnsorge,Franziska Lieselotte & Ye,Lei Sandy & Islamaj,Ergys, 2017. "Weakness in investment growth : causes, implications and policy responses," Policy Research Working Paper Series 7990, The World Bank.
    14. David P. Brown & Andrew Eckert, 2018. "Analyzing the Impact of Electricity Market Structure Changes and Mergers: The Importance of Forward Commitments," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 52(1), pages 101-137, February.
    15. Graeme Guthrie, 2006. "Regulating Infrastructure: The Impact on Risk and Investment," Journal of Economic Literature, American Economic Association, vol. 44(4), pages 925-972, December.
    16. van Koten, Silvester & Ortmann, Andreas, 2013. "Structural versus behavioral remedies in the deregulation of electricity markets: An experimental investigation motivated by policy concerns," European Economic Review, Elsevier, vol. 64(C), pages 256-265.
    17. Le Coq, Chloe & Orzen, Henrik, 2006. "Do forward markets enhance competition?: Experimental evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 61(3), pages 415-431, November.
    18. Lewis Evans, 2004. "The efficiency test under competition law and regulation in the small distant open economy that is New Zealand," New Zealand Economic Papers, Taylor & Francis Journals, vol. 38(2), pages 241-264.
    19. Willems, Bert & Rumiantseva, Ina & Weigt, Hannes, 2009. "Cournot versus Supply Functions: What does the data tell us?," Energy Economics, Elsevier, vol. 31(1), pages 38-47, January.
    20. M. Puy, 2013. "Stable coalition governments: the case of three political parties," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 40(1), pages 65-87, January.

    More about this item

    Keywords

    Infrastructural investment; regulation; electoral competition; laboratory experiment;

    JEL classification:

    • L5 - Industrial Organization - - Regulation and Industrial Policy
    • L43 - Industrial Organization - - Antitrust Issues and Policies - - - Legal Monopolies and Regulation or Deregulation
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • C9 - Mathematical and Quantitative Methods - - Design of Experiments

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:tin:wpaper:20130046. 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: (Tinbergen Office +31 (0)10-4088900). General contact details of provider: http://edirc.repec.org/data/tinbenl.html .

    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 CitEc recognized a reference but did not link an item in RePEc 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 RePEc Author Service 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.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.