We explore the separation of powers between the legislative and the executive branch of government as a way of overcoming
the dynamic consistency problem of regulatory policy towards investment. We model the industry as a regulated duopoly.
The incumbent is a vertically integrated firm that owns a wholesale unit and a retail unit. The entrant only owns a retail unit.
Either retail unit needs access to the input produced by the wholesale unit to operate. The regulator is unable to commit to a
policy and the legislator sets the regulator's objective function. We derive general conditions under which, having the
legislator distort the regulator's objective function away from social welfare, allows implementing socially desirable
investment.
Factores socioeconómicos y tecnológicos que incidirán en la adopción de la te...
Investment, dynamic consistency and the sectoral regulator's objective - Duarte Brito (2011)
1. Brito et al. Investment, Dynamic Consistency and the Sectoral Regulator's Objective
Investment, Dynamic Consistency and the Sectoral
Regulator's Objective
Duarte Brito Pedro Pereira
FCT-UNL and Cefage Adc
dmmcbrito@gmail.com pedro.br.pereira@gmail.com
João Vareda
AdC and IST
joao.vareda@concorrencia.pt
BIOGRAPHIES
Duarte Brito received his doctorate in economics from the Universidade Nova de Lisboa in 2001 and has been an assistant
professor at Faculdade de Ciências e Tecnologia, UNL since 2002. He is research fellow of the CEFAGE-UE and has
published one monograph and a dozen papers in international economics journals His main research interest is industrial
organization and he has been awarded several prizes and grants.
Pedro Pereira is a Senior Economist at the Portuguese Competition Authority. Pereira holds a doctorate from the University
of California, San Diego. He published on journals including Regional Science and Urban Economics, International Journal
of Industrial Organization, Information Economics and Policy, Southern Economic Journal, Review of Industrial
Organization.
João Vareda received his doctorate in Economics from the Universidade Nova de Lisboa in 2008. Presently, he works at the
Portuguese Competition Authority. His main research interests are Telecommunications Regulation and Competition Policy
and he has been awarded several prizes and grants. He recently published in the International Journal of Industrial
Organization, Information Economics and Policy, The B.E. Journal of Economic Analysis & Policy and Telecommunications
Policy.
ABSTRACT
We explore the separation of powers between the legislative and the executive branch of government as a way of overcoming
the dynamic consistency problem of regulatory policy towards investment. We model the industry as a regulated duopoly.
The incumbent is a vertically integrated firm that owns a wholesale unit and a retail unit. The entrant only owns a retail unit.
Either retail unit needs access to the input produced by the wholesale unit to operate. The regulator is unable to commit to a
policy and the legislator sets the regulator's objective function. We derive general conditions under which, having the
legislator distort the regulator's objective function away from social welfare, allows implementing socially desirable
investment.
Keywords
Investment, Dynamic Consistency, Regulator's Objective
Proceedings of the 5th ACORN-REDECOM Conference, Lima, May 19-20th, 2011 229