Price Regulation, Investment and the Commitment Problem

No 3200, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We consider a dynamic model of price regulation with asymmetric information where strategic delegation is available to the regulator. Firms can sink non- contractible, cost-reducing investment but regulators cannot commit to future price levels. We fully characterize the Perfect Bayesian equilibria and show that, with incentive contracts but without delegation, under- and over-investment can occur. We then show that delegation to a suitable regulator can both improve investment incentives and ameliorate the ratchet effect by credibly offering the firm future rent. Simulations indicate significant welfare gains from these two effects and that a wide range of regulatory preferences can achieve this result.

Keywords: commitment; price regulation; under investment (search for similar items in EconPapers)
JEL-codes: L51 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ind
Date: 2002-02
View list of references View citations in EconPapers

Downloads: (external link)
http://www.cepr.org/pubs/dps/DP3200.asp (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Working Paper: Price Regulation, Investment and the Commitment Problem (2003)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Ordering information: This working paper can be ordered from
http://www.cepr.org/pubs/dps/DP3200.asp

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers
Address: Centre for Economic Policy Research, 53--56 Great Sutton Street, London EC1V 0DG
Series data maintained by ().