Regulation with Rationed Information or Deegation: Solutions to the Under-Investment Problem
Regulation Initiative Working Paper Series No. 43
33 Pages Posted: 10 Nov 2003
Date Written: February 2001
A new perspevtive is provided on the under-investment problem in the regulation of a firm with market power. We compare a political equilibrium based on a voting model with lobbying with a delegation equilbrium, where a government can delegate to a particular 'type' of pro- or anti-industry regualtor. Our analysis suggests two possible ways in which we may observe effective, although second-best, price regulation that both encourages socially optimal investment and ensures consumers benefit: First, voters recieve just the amount of information that maximises social welfare and second, the decisions on price are delegated to a sufficiently, but not excessively, pro-industry regulator.
Keywords: under-investment, political equilibrium, delegation
JEL Classification: L51
Suggested Citation: Suggested Citation