Regulatory Risk under Optimal Incentive Regulation

Roland Strausz ()

No CESifo Working Paper No. 2638, CESifo Working Paper Series from CESifo Group Munich

Abstract: The paper provides a tractable, analytical framework to study regulatory risk. Regulatory risk is captured by uncertainty about the policy variables in the regulator’s objective function: weights attached to profits and costs of public funds. Results are as follows: 1) The regulator’s reaction to regulatory risk depends on the curvature of aggregate demand. 2) It yields a positive information rent effect exactly when demand is convex. 3) Firms benefit from regulatory risk exactly when demand is convex. 4) Consumers’ risk preferences tend to contradict the firm’s. 5) Benevolent regulators always prefer regulatory risk and these preferences may contradict both the firm’s and consumers’.

Keywords: optimal incentive regulation; regulatory risk; benevolent regulators; information rents (search for similar items in EconPapers)
JEL-codes: D82 L51 (search for similar items in EconPapers)
Date: Written
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Related works:
Working Paper: Regulatory Risk under Optimal Incentive Regulation (2009)
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Persistent link: http://EconPapers.repec.org/RePEc:ces:ceswps:_2638

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