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Price Regulation, Investment and the Commitment Problem

Levine, P and Rickman, N Price Regulation, Investment and the Commitment Problem .

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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 characterise the perfect Bayesian equilibrium and show that, with incentive contracts and no delegation, under-investment occurs. 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.

Item Type: Other
Divisions : Surrey research (other units)
Authors :
Rickman, N
Uncontrolled Keywords : L51, under-investment, commitment, price regulation
Depositing User : Symplectic Elements
Date Deposited : 16 May 2017 15:14
Last Modified : 23 Jan 2020 10:25

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