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Oxford Economic Papers Advance Access originally published online on February 28, 2005
Oxford Economic Papers 2005 57(3):447-478; doi:10.1093/oep/gpi021
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© Oxford University Press 2005; All rights reserved

Utility price regulation and time inconsistency: comparisons with monetary policy

Paul Levine*, Jon Stern{dagger}, and Francesc Trillas{ddagger}

*Department of Economics, University of Surrey, Guildford, Surrey GU2 5XH; e-mail: p.levine{at}surrey.ac.uk {dagger}London Business School {ddagger}Universitat Autonòma de Barcelona

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.

Key Words: JEL classification: C72 • E61 • L51


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