Regulation with 20-20 Hindsight: "Heads I Win, Tails You Lose"?

Thomas Lyon ()

RAND Journal of Economics, 1991, vol. 22, issue 4, 581-595

Abstract: Regulators are commonly accused of using 20-20 hindsight to punish a firm for bad outcomes rather than bad decisions; it is often thought that such penalties lead to underinvestment by the firm. I find that this expectation is not borne out when retrospective review is based on the firm's avoided costs. In a Joskow-type model, hindsight review mitigates the firm's tendency to build oversized risky projects, moving the firm closer to the cost-minimizing level of investment. In a rate-of-return model, the firm's allowed rate of return may have to be increased to keep expected profits nonnegative. If this is done, hindsight review does not affect the firm's investment level, but it does correct the (risk-neutral) firm's tendency to pay an excessive premium to eliminate construction cost uncertainty.

Date: 1991
References: Add references at CitEc
Citations: View citations in EconPapers (20)

Downloads: (external link)
http://links.jstor.org/sici?sici=0741-6261%2819912 ... O%3B2-7&origin=repec full text (application/pdf)
Access to full text is restricted to JSTOR subscribers. See http://www.jstor.org for details.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:rje:randje:v:22:y:1991:i:winter:p:581-595

Ordering information: This journal article can be ordered from
https://editorialexp ... i-bin/rje_online.cgi

Access Statistics for this article

More articles in RAND Journal of Economics from The RAND Corporation
Bibliographic data for series maintained by ().