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Investment, dynamic consistency and the sectoral regulator's obective

Duarte Brito, Pedro Pereira and João Vareda ()

8th ITS Asia-Pacific Regional Conference, Taipei 2011: Convergence in the Digital Age from International Telecommunications Society (ITS)

Abstract: We explore the separation of powers between the legislative and the executive branch of government as a way of overcoming the dynamic consistency problem of regulatory policy towards investment. We model the industry as a regulated duopoly. The incumbent is a vertically integrated firm that owns a wholesaler and a retailer. The entrant owns a retailer. Either retailer needs access to the input produced by the wholesaler to operate. The incumbent can make an investment that improves the quality of the input produced by the wholesaler. The regulator sets the access price and is unable to commit. The legislator sets the regulator's objective function and is able to commit. We derive general conditions under which having the legislator distort the regulator's objective function away from social welfare allows increasing the range of parameter values for which it is possible to induce socially desirable investment.

Keywords: Investment; Dynamic Consistency; Regulator's Objective (search for similar items in EconPapers)
JEL-codes: L43 L51 L96 L98 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-reg
Date: 2011
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Journal Article: Investment, Dynamic Consistency and the Sectoral Regulator’s Objective (2013) Downloads
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