Utility Price Regulation and Time Inconsistency: Comparisons with Monetary Policy

Posted: 29 Feb 2008

See all articles by Paul Levine

Paul Levine

School of Economics, University of Surrey

John Stern

affiliation not provided to SSRN

Francesc Trillas

Autonomous University of Barcelona - Department of Economics; University of Navarra - IESE Business School

Date Written: July 2005

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.

JEL Classification: C72; E61; L51

Suggested Citation

Levine, Paul L. and Stern, John and Trillas Jané, Francesc, Utility Price Regulation and Time Inconsistency: Comparisons with Monetary Policy (July 2005). Oxford Economic Papers, Vol. 57, Issue 3, pp. 447-478, 2005. Available at SSRN: https://ssrn.com/abstract=916834

Paul L. Levine (Contact Author)

School of Economics, University of Surrey ( email )

Guildford
Surrey GU2 7XH
United Kingdom
+44 1483 259 380 Ext. 2773 (Phone)
+44 1483 259 548 (Fax)

John Stern

affiliation not provided to SSRN

No Address Available

Francesc Trillas Jané

Autonomous University of Barcelona - Department of Economics ( email )

Avda. Diagonal 690
Barcelona, 08034
Spain

University of Navarra - IESE Business School

Avenida Pearson 21
Barcelona, 08034
Spain

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