Investment, dynamic consistency and the sectoral regulator's objective

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Abstract

This article explores the possibility of distorting the regulatorís objective function as a way of overcoming the dynamic consistency problem of regulatory policy towards investment. We derive general conditions under which, having the legislator distort the regulatorís objective function away from social welfare allows increasing the range of parameter values for which it is possible to induce socially desirable investment. In particular, we show that when the regulator cannot commit to a regulatory policy, the legislator should give a relatively higher weight to the incumbentís proÖt in the regulatorís objective function, if the incumbent invests, and a relatively higher weight to consumer surplus, if the incumbent does not invest.
Original languageEnglish
Pages (from-to)563-594
JournalB E Journal Of Economic Analysis & Policy
Volume13
Issue number2
DOIs
Publication statusPublished - 2013

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