Regulation as a Bargaining Process: Negotiation over Price and Cost-Reducing Investments

Carlo Scarpa

Oxford Economic Papers, 1994, vol. 46, issue 3, 357-65

Abstract: This paper develops the idea that industry regulation can be treated as a bargaining between a firm and the public authority, and illustrates some consequences of this formulation. The author investigates a typical regulatory problem where a firm chooses a cost-reducing investment before price is subject to regulation. In a standard scheme, investment will be lower than required by efficiency. If the possibility of negotiation is taken into account, the author then shows that this undercapitalization result can be reversed. Indeed, with sunk costs excessive capitalization can be observed. Copyright 1994 by Royal Economic Society.

Date: 1994
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