Utility price regulation and time inconsistency: comparisons with monetary policy

Paul Levine (), Jon Stern and Francesc Trillas

Oxford Economic Papers, 2005, vol. 57, issue 3, 447-478

Abstract: We examine the hold-up problem of price regulation and compare it with the monetary policy credibility problem. For both, reputational solutions are possible provided that the policymaker is sufficiently far-sighted, but the hold-up problem in regulation turns out to be more serious than the inflation bias problem in monetary policy. Even with far-sighted regulators, a reputational equilibrium with optimal investment is undermined if capital depreciates slowly and consumer demand increases slowly. These results make the Rogoff-delegation solution to the regulatory commitment problem especially attractive. The paper concludes with a short discussion linking these results to the empirical literature on utility regulatory regimes. Copyright 2005, Oxford University Press.

Date: 2005
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