Pass-through, profits and the political economy of regulation

Felix Grey and Robert Ritz

Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge

Abstract: Government regulation, such as the pricing of externalities, often raises the unit costs of regulated firms, and its impact on their profits is important to its political economy. We introduce a reduced-form model (“GLM”) that nests existing models of imperfect competition under weaker assumptions. We show how a firm's cost passthrough is a sufficient statistic for the profit impact of regulation. We apply the GLM to carbon pricing for US airlines. We find large inter-firm heterogeneity in pass-through, even for a uniform cost shock. The GLM allows us to sidestep estimation of a consumer demand system, firm markups and conduct parameters. We derive the second-best emissions tax including lobbying a government “for sale”.

Keywords: Cost pass-through; regulation; carbon pricing; airlines; political economy (search for similar items in EconPapers)
JEL-codes: D43 H23 L51 L92 Q54 (search for similar items in EconPapers)
Date: 2018-10-17
New Economics Papers: this item is included in nep-com, nep-ene, nep-env and nep-reg
Note: rar36
References: Add references at CitEc
Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Pass-through, profits and the political economy of regulation (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:cam:camdae:1859

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