Price Regulation and the Commitment Problem: Can Limited Capture be Beneficial?

Paul Levine (), Neil Rickman and Francesc Trillas

No 106, School of Economics Discussion Papers from School of Economics, University of Surrey

Abstract: We consider two aspects of the commitment problem in price regulation with lobbying the ratchet effect and the hold-up problem. We set out a dynamic model of price regulation with asymmetric information where the regulated firm can ‘buy influence’ in a lobbying equilibrium. Firms can sink non-contractible, cost-reducing investment but regulators cannot commit to future price levels. We fully characterize the perfect Bayesian equilibrium and show that the lobbying equilibrium can both ameliorate the ratchet effect and improve investment incentives by credibly offering the firm future rent. Simulations indicate significant welfare gains are possible from these two effects and that a range of lobbying outcomes can achieve this result.

Keywords: price regulation; commitment problem; ratchet effect; under-investment (search for similar items in EconPapers)
JEL-codes: L51 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2006-02
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:sur:surrec:0106

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