Regulation Games

Richard Gilbert and David M Newbery

No 267, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We examine regulation as a repeated game between a regulator and a utility facing a Markovian sequence of demands. Sunk capital would be expropriated by a regulator concerned only with the short-run interests of consumers. There exist rate of return regulatory policies supporting efficient investment paths with zero expected profits as subgame perfect Nash equilibria, but these policies must under-reward capital in some states of the world. Carefully designed nonlinear price regulation can improve on these equilibrium outcomes, although at higher consumer costs, and only if state-contingent transfers are feasible.

Keywords: Nash Equilibrium; Regulation; Regulatory Policy; Repeated Game; Utilities (search for similar items in EconPapers)
Date: 1988-09
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