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The optimal level of regulatory commitment

The optimal level of regulatory commitment
The optimal level of regulatory commitment
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.
9705
University of Southampton
Watts, C.
e02080c6-ce2c-4dfe-892d-b4f270538d24
Watts, C.
e02080c6-ce2c-4dfe-892d-b4f270538d24

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

Record type: Monograph (Discussion Paper)

Abstract

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.

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Published date: January 1997
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Local EPrints ID: 33179
URI: http://eprints.soton.ac.uk/id/eprint/33179
PURE UUID: b5adc6d1-7956-48c9-8b2d-d5734be54d88

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Date deposited: 25 Jan 2008
Last modified: 11 Dec 2021 15:19

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Author: C. Watts

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