Foresight and Public Utility Regulation

Michael Gort and Richard A Wall

Journal of Political Economy, 1988, vol. 96, issue 1, 177-88

Abstract: This paper develops a model that shows the effects of rational expectations, and of efficient mark ets, on public utility regulation. It is shown that the feedback from investor expectations to regulatory behavior, together with investor expectations that take account of this feedback, basically alters th e consequences of regulatory decisions. The analysis examines the eff ects of a deviation between the allowed rate of return and the cost o f capital, with both perfect and imperfect investor foresight. It als o assesses the consequences of differing expected growth rates. Concl usions are drawn for the effects of regulatory decisions on resource misallocation and of regulatory lag on incentives. Copyright 1988 by University of Chicago Press.

Date: 1988
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