Utility Price Regulation and Time Inconsistency: Comparisons with Monetary Policy
Posted: 29 Feb 2008
Date Written: July 2005
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.
JEL Classification: C72; E61; L51
Suggested Citation: Suggested Citation