Investment, Dynamic Consistency and the Sectoral Regulator’s Objective

Duarte Brito, Pedro Pereira and João Vareda ()

The B.E. Journal of Economic Analysis & Policy, 2013, vol. 13, issue 2, 563-594

Abstract: This article explores the possibility of distorting the regulator’s objective function as a way of overcoming the dynamic consistency problem of regulatory policy toward investment. 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. In particular, we show that when the regulator cannot commit to a regulatory policy, the legislator should give a relatively higher weight to the incumbent’s profit in the regulator’s objective function, if the incumbent invests, and a relatively higher weight to consumer surplus, if the incumbent does not invest.

Keywords: investment; dynamic consistency; regulator’s objective (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (2)

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Working Paper: Investment, dynamic consistency and the sectoral regulator's obective (2011)
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DOI: 10.1515/bejeap-2013-0026

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