Price Regulation, Investment and the Commitment Problem

Paul Levine () and Neil Rickman

No 3200, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We consider a dynamic model of price regulation with asymmetric information where strategic delegation is available to the regulator. Firms can sink non- contractible, cost-reducing investment but regulators cannot commit to future price levels. We fully characterize the Perfect Bayesian equilibria and show that, with incentive contracts but without delegation, under- and over-investment can occur. We then show that delegation to a suitable regulator can both improve investment incentives and ameliorate the ratchet effect by credibly offering the firm future rent. Simulations indicate significant welfare gains from these two effects and that a wide range of regulatory preferences can achieve this result.

Keywords: Under investment; Commitment; Price regulation (search for similar items in EconPapers)
JEL-codes: L51 (search for similar items in EconPapers)
Date: 2002-02
New Economics Papers: this item is included in nep-ind
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Citations: View citations in EconPapers (8)

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