Regulatory risk under optimal incentive regulation

Roland Strausz

No 2009-006, SFB 649 Discussion Papers from Humboldt University Berlin, Collaborative Research Center 649: Economic Risk

Abstract: The paper provides a tractable, analytical framework to study regulatory risk under optimal incentive regulation. Regulatory risk is captured by uncertainty about the policy variables in the regulator's objective function: weights attached to profits and costs of public funds. Results are as follows: 1) The regulator's reaction to regulatory risk depends on the curvature of the aggregate demand function. 2) It yields a positive information rent effect exactly when demand is convex. 3) Firms benefit from regulatory risk exactly when demand is convex. 4) Consumers' risk preferences tend to contradict the firms. 5) Benevolent regulators always prefer regulatory risk and these preferences may contradict both the firms and consumers' preferences.

Keywords: Optimal incentive regulation; regulatory risk; procurement; information rents (search for similar items in EconPapers)
JEL-codes: D82 L51 (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (2)

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Related works:
Working Paper: Regulatory Risk under Optimal Incentive Regulation (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:sfb649:sfb649dp2009-006

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