Regulatory Risk under Optimal Incentive Regulation

Roland Strausz ()

No SFB649DP2009-006, SFB 649 Discussion Papers from Humboldt University, Collaborative Research Center 649

Abstract: The paper provides a tractable, analytical framework to study regulatory risk under optimal incentive regulation. 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 the aggregate demand function. 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’ preferences.

Keywords: optimal incentive regulation; regulatory risk; procurement; information rents (search for similar items in EconPapers)
JEL-codes: L51 D82 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cta and nep-reg
Date: 2009-01
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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:hum:wpaper:sfb649dp2009-006

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