Regulation Initiative Working Paper No. 52 Independent Utility Regulators: Lessons from Monetary Policy

This paper explores the similarity and differences 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 far-sighted. But even if regulators are far-sighted, 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 Rogoff-delegation solution to the regulatory commitment problem especially attractive. The paper concludes with a short discussion that links these theoretical considerations to the empirical literature on utility regulatory regimes. JEL Classification: C72, E61,L51