Utility price regulation and time inconsistency: Comparisons with monetary policy

Paul Levine, John Stern, Francesc Trillas

Research output: Contribution to journalArticleResearchpeer-review

26 Citations (Scopus)

Abstract

We examine the hold-up problem of price regulation and compare it with the monetary policy credibility problem. For both, reputational solutions are possible provided that the policymaker is sufficiently far-sighted, but the hold-up problem in regulation turns out to be more serious than the inflation bias problem in monetary policy. Even with far-sighted regulators, a reputational equilibrium with optimal investment is undermined if capital depreciates slowly and consumer demand increases slowly. These results make the Rogoff-delegation solution to the regulatory commitment problem especially attractive. The paper concludes with a short discussion linking these results to the empirical literature on utility regulatory regimes. © Oxford University Press 2005 All rights reserved.
Original languageEnglish
Pages (from-to)447-478
JournalOxford Economic Papers
Volume57
DOIs
Publication statusPublished - 1 Jul 2005

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