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Investment, dynamic consistency and the sectoral regulator's obective

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  • Brito, Duarte
  • Pereira, Pedro
  • Vareda, João

Abstract

We explore the separation of powers between the legislative and the executive branch of government as a way of overcoming the dynamic consistency problem of regulatory policy towards investment. We model the industry as a regulated duopoly. The incumbent is a vertically integrated firm that owns a wholesaler and a retailer. The entrant owns a retailer. Either retailer needs access to the input produced by the wholesaler to operate. The incumbent can make an investment that improves the quality of the input produced by the wholesaler. The regulator sets the access price and is unable to commit. The legislator sets the regulator's objective function and is able to commit. We derive general conditions under which having the legislator distort the regulator's objective function away from social welfare allows increasing the range of parameter values for which it is possible to induce socially desirable investment.

Suggested Citation

  • Brito, Duarte & Pereira, Pedro & Vareda, João, 2011. "Investment, dynamic consistency and the sectoral regulator's obective," 8th ITS Asia-Pacific Regional Conference, Taipei 2011: Convergence in the Digital Age 52341, International Telecommunications Society (ITS).
    • Handle: RePEc:zbw:itsp11:52341
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    Cited by:

    1. Vogelsang Ingo, 2013. "The Endgame of Telecommunications Policy? A Survey," Review of Economics, De Gruyter, vol. 64(3), pages 193-270, December.

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    More about this item

    Keywords

    Investment; Dynamic Consistency; Regulator's Objective;
    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
    • L96 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Telecommunications
    • L98 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Government Policy

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