Commitment in Utility Regulation: A Model of Reputation and Policy Applications

22 Pages Posted: 9 Sep 2015

Date Written: 2013

Abstract

This paper builds a dynamic model of utility regulation where a government cannot commit to a time-inconsistent policy of not expropriating investment.By allowing the government’s type to change over time, I explore how reputation concerns may generate partial commitment. Restricting attention to equilibria that are strongly renegotiation proof, I show that there is a unique perfect Bayesian equilibrium. This contains episodes of investment and good behaviour followed by periods of expropriation and non-investment. I then apply the model to consider how the power of the incentive scheme and decentralization may influence the properties of this equilibrium. In the case of the power of incentives, the model suggests that price-caps may worsen commitment in developing countries, but not in developed ones. Similarly, the model suggests that decentralisation is likely to have a significant effect on commitment, but that this effect will depend on the general ability of the government to commit. Overall, we conclude that the effect of such policies on commitment will be different across countries, depending on the institutional environment.

Keywords: Reputation, Commitment, Regulation

JEL Classification: C73, L14, L51, L97

Suggested Citation

Wren-Lewis, Liam, Commitment in Utility Regulation: A Model of Reputation and Policy Applications (2013). Journal of Economic Behavior and Organization, Vol. 89, 2013. Available at SSRN: https://ssrn.com/abstract=2657142

Liam Wren-Lewis (Contact Author)

Paris School of Economics (PSE) ( email )

48 Boulevard Jourdan
Paris, 75014 75014
France

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