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The B.E. Journal of Economic Analysis & Policy

Editor-in-Chief: Jürges, Hendrik / Ludwig, Sandra

Ed. by Auriol , Emmanuelle / Brunner, Johann / Fleck, Robert / Mendola, Mariapia / Requate, Till / Schirle, Tammy / de Vries, Frans / Zulehner, Christine

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Volume 13, Issue 2


Volume 6 (2006)

Volume 4 (2004)

Volume 2 (2002)

Volume 1 (2001)

Investment, Dynamic Consistency and the Sectoral Regulator’s Objective

Duarte Brito
  • Corresponding author
  • Departamento de Ciências Sociais Aplicadas, Faculdade de Ciências e Tecnologia, Universidade Nova de Lisboa, Caparica, Portugal; and CEFAGE-UE, Évora, Portugal
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/ Pedro Pereira / João Vareda
Published Online: 2013-08-10 | DOI: https://doi.org/10.1515/bejeap-2013-0026


This article explores the possibility of distorting the regulator’s objective function as a way of overcoming the dynamic consistency problem of regulatory policy toward investment. We derive general conditions under which having the legislator distort the regulator’s objective function away from social welfare allows increasing the range of parameter values for which it is possible to induce socially desirable investment. In particular, we show that when the regulator cannot commit to a regulatory policy, the legislator should give a relatively higher weight to the incumbent’s profit in the regulator’s objective function, if the incumbent invests, and a relatively higher weight to consumer surplus, if the incumbent does not invest.

Keywords: investment; dynamic consistency; regulator’s objective


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About the article

Published Online: 2013-08-10

Citation Information: The B.E. Journal of Economic Analysis & Policy, Volume 13, Issue 2, Pages 563–594, ISSN (Online) 1935-1682, ISSN (Print) 2194-6108, DOI: https://doi.org/10.1515/bejeap-2013-0026.

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