Regulation Initiative Working Paper series Number 43 Regulation with Rationed Information or Delegation: Solutions to the under Investment Problem

A new perspective is provided on the under-investment problem in the regulation of a rm with market power. We compare a political equilibrium based on a voting model with lobbying with a delegation equilibrium, where a government can delegate to a particular `type' of proor anti-industry regulator. Our analysis suggests two possible ways in which we may observe e ective, although second-best, price regulation that both encourages socially optimal investment and ensures consumers bene t: rst, voters receive just the amount of information that maximizes social welfare and second, the decisions on price are delegated to a su ciently, but not excessively, pro-industry regulator. JEL Classi cation: L51