Issue: Winter 1994
Pages: pp. 538-554
Authors: Richard J. Gilbert and David M. Newbery
Title: The Dynamic Efficiency of Regulatory Constitutions
Abstract: In this article, we model regulation as a repeated game between a utility facing a random sequence of demands and a regulator tempted to underreward past investment. Rate-of-return regulation designed with a constitutional commitment to an adequate rate of return on capital prudently invested is able to support an efficient investment program as a subgame-perfect Nash equilibrium for a larger set of parameter values than rate-of-return regulation without such a commitment. Furthermore, rate-of-return regulation is superior to price regulation according to the same criterion, assuming that the regulator is unable to make state-contingent transfer payments.
Economics of Regulation (L510)
Economics of Regulation (6190)