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Airport Using Forward Contracts to Reduce Regulatory Capture

Author

Listed:
  • Felix Höffler
  • Sebastian Kranz

Abstract

A fully unbundled, regulated network frm of unknown efficiency level can undertake unobservable effort to increase the likelihood of low downstream prices, e.g., by facilitating downstream competition. To incentivize such effort, the regulator can use an incentive scheme paying transfers to the firm contingent on realized downstream prices. Alternatively, the regulator can propose to the firm to sell the following forward contracts: the firm pays the downstream price to the owners of a contract, but receives the expected value of the contracts when selling them to a competitive financial market. We compare the two regulatory tools with respect to regulatory capture: if the regulator can be bribed to suppress information on the underlying state of the world (the basic probability of high downstream prices, or the type of the firm), optimal regulation uses forward contracts only.

Suggested Citation

  • Felix Höffler & Sebastian Kranz, 2010. "Airport Using Forward Contracts to Reduce Regulatory Capture," WHU Working Paper Series - Economics Group 10-02, WHU - Otto Beisheim School of Management.
    • Handle: RePEc:whu:wpaper:10-02
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    More about this item

    Keywords

    Incentive regulation; regulatory capture; virtual power plants;
    All these keywords.

    JEL classification:

    • L43 - Industrial Organization - - Antitrust Issues and Policies - - - Legal Monopolies and Regulation or Deregulation
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • K23 - Law and Economics - - Regulation and Business Law - - - Regulated Industries and Administrative Law
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities

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