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Regulatory risk under optimal incentive regulation

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  • Strausz, Roland

Abstract

The paper provides a tractable, analytical framework to study regulatory risk under optimal incentive regulation. Regulatory risk is captured by uncertainty about the policy variables in the regulator's objective function: weights attached to profits and costs of public funds. Results are as follows: 1) The regulator's reaction to regulatory risk depends on the curvature of the aggregate demand function. 2) It yields a positive information rent effect exactly when demand is convex. 3) Firms benefit from regulatory risk exactly when demand is convex. 4) Consumers' risk preferences tend to contradict the firms. 5) Benevolent regulators always prefer regulatory risk and these preferences may contradict both the firms and consumers' preferences.

Suggested Citation

  • Strausz, Roland, 2009. "Regulatory risk under optimal incentive regulation," SFB 649 Discussion Papers 2009-006, Humboldt University Berlin, Collaborative Research Center 649: Economic Risk.
    • Handle: RePEc:zbw:sfb649:sfb649dp2009-006
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    Cited by:

    1. Michał Grajek & Lars-Hendrik Röller, 2012. "Regulation and Investment in Network Industries: Evidence from European Telecoms," Journal of Law and Economics, University of Chicago Press, vol. 55(1), pages 189-216.
    2. Strausz, Roland, 2009. "The political economy of regulatory risk," SFB 649 Discussion Papers 2009-040, Humboldt University Berlin, Collaborative Research Center 649: Economic Risk.
    3. Darryl S. L. Jarvis, 2010. "Institutional processes and regulatory risk: A case study of the Thai energy sector," Regulation & Governance, John Wiley & Sons, vol. 4(2), pages 175-202, June.
    4. repec:hum:wpaper:sfb649dp2009-041 is not listed on IDEAS
    5. Grith, Maria & Härdle, Wolfgang Karl & Park, Juhyun, 2009. "Shape invariant modelling pricing kernels and risk aversion," SFB 649 Discussion Papers 2009-041, Humboldt University Berlin, Collaborative Research Center 649: Economic Risk.
    6. Michael Funke & Marc Gronwald, 2009. "A Convex Hull Approach to Counterfactual Analysis of Trade Openness and Growth," CESifo Working Paper Series 2692, CESifo.
    7. repec:hum:wpaper:sfb649dp2009-039 is not listed on IDEAS
    8. Choroś, Barbara & Härdle, Wolfgang Karl & Okhrin, Ostap, 2009. "CDO and HAC," SFB 649 Discussion Papers 2009-038, Humboldt University Berlin, Collaborative Research Center 649: Economic Risk.
    9. repec:hum:wpaper:sfb649dp2009-038 is not listed on IDEAS
    10. repec:hum:wpaper:sfb649dp2009-040 is not listed on IDEAS

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    More about this item

    Keywords

    Optimal incentive regulation; regulatory risk; procurement; information rents;
    All these keywords.

    JEL classification:

    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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    This paper has been announced in the following NEP Reports:

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