Investment with unstable regulation

Time: Tuesday October 2nd, 13.00-14.00 hours
Location: CPB-office, Van Stolkweg 14, The Hague

Presentation: Aljaz Ule (UvA)

Discussant: TBA

Language: English

Registration:  Please register by sending an email to seminars@cpb.nl.

Abstract subject: In this paper we investigate infrastructure investment in markets where regulation is subject to varying degrees of political manipulation. Based on a model of price regulation in a market with increasing demand and long-term returns on investment we construct a multi-period game between a service provider, consumers with voting rights and elected decision makers. In each period the consumers elect a decision maker who may then regulate the price for service provision. Before an election the service provider chooses whether to increase its capacity against an investment cost. Investment is irreversible and profitable only with a sufficiently high price for service provision. We investigate the price and investment dynamics in this game through an experiment with human subjects, where we vary the decision-makers’ ability to affect regulation across the treatments. Our results show that investment is profitable only when decision-makers’ interests align with those of the service-provider. This leads to relatively efficient price and investment behavior. In contrast, when decision-makers’ interests align with consumers the service providers invest too early or too late. Surprisingly, we only find weak effects of the regulatory framework.

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