Lobbies, Delegation and the Under-investment Problem in Regulation

Joanne Evans, Paul Levine () and Francesc Trillas

No 2006, School of Economics Discussion Papers from School of Economics, University of Surrey

Abstract: A time-inconsistency problem in regulation often results in under-investment es- pecially where there are high sunk costs in network industries such as electricity, gas, telecommunications and water. This paper provides a new perspective on this ‘hold-up’ problem facing the price regulation of a firm with market power where full commitment to a price regime is not possible. We compare a political equilibrium based on a voting model with lobbying with a delegation equilibrium, where a gov- ernment can delegate to a particular ‘type’ of pro- or anti-industry regulator. Our analysis suggests two possible ways in which we may observe price regulation that en- courages socially optimal investment in the absence of externally imposed regulatory commitment: first, there is less than total transparency in which voters receive an optimal amount of information and second, the decisions on price are delegated to a sufficiently, but not excessively, pro-industry regulator.

Keywords: under-investment; political equilibrium; capture; delegation. (search for similar items in EconPapers)
JEL-codes: L51 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2006-08
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

Forthcoming in International Journal of Industrial Organization

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Journal Article: Lobbies, delegation and the under-investment problem in regulation (2008)
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