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

Levine, P, Rickman, N and Trillas, F Price Regulation and the Commitment Problem: Can Limited Capture be Beneficial? .

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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.

Item Type: Other
Authors :
NameEmailORCID
Levine, Pp.levine@surrey.ac.ukUNSPECIFIED
Rickman, NUNSPECIFIEDUNSPECIFIED
Trillas, FUNSPECIFIEDUNSPECIFIED
Uncontrolled Keywords : L51, price regulation, commitment problem, ratchet effect, under-investment
Depositing User : Symplectic Elements
Date Deposited : 16 May 2017 15:14
Last Modified : 17 May 2017 14:33
URI: http://epubs.surrey.ac.uk/id/eprint/818182

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