The optimal level of regulatory commitment

Watts, C. (1997) The optimal level of regulatory commitment. Southampton, UK, University of Southampton (Discussion Papers in Economics and Econometrics 9705).


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We examine the relative benefits of regulatory commitment and discretion arising from the incompleteness of contracts. Full commitment gives strong incentives for investment, but leaves the regulator unable to bring prices in line with costs or gives the firm large rents. Full discretion on the other hand offers no incentive to invest, but achieves allocative efficiency. We consider a monopoly firm with known demand but unknown costs and show that the elasticity of demand, the cost of investment, the weight on profits and the level of uncertainty are important factors in determining the optimal level of commitment.

Item Type: Monograph (Discussion Paper)
Related URLs:
Subjects: H Social Sciences > HB Economic Theory
Divisions : University Structure - Pre August 2011 > School of Social Sciences > Economics
ePrint ID: 33179
Accepted Date and Publication Date:
January 1997Made publicly available
Date Deposited: 25 Jan 2008
Last Modified: 27 Mar 2014 18:20

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