Independent Utility Regulators: Lessons from Monetary Policy

Levine, P, Stern, J and Trillas, F (2003) Independent Utility Regulators: Lessons from Monetary Policy. Working Paper. London Business School Regulation Initiative Working Paper Series.

Abstract

This paper explores the similarity and difference between the credibility problem of monetary policy and the under investment problem of price regulation. In both cases reputational solutions are possible, provided that the policymaker is sufficiently farsighted. But even if regulators are farsighted, this solution to the investment problem is undermined if capital depreciates slowly. Flexible commitment rules are difficult to monitor and sustain as reputational equilibria. These considerations make the Rogoffdelegation solution to the regulatory commitment problem espcially attractive. The paper concludes with a short discussion that links these theortical considerations to the empirical literature on utility regulatory regimes.