Discussion paper

DP267 Regulation Games

We examine regulation as a repeated game between a regulator and a utility facing a Markovian sequence of demands. Sunk capital would be expropriated by a regulator concerned only with the short-run interests of consumers. There exist rate of return regulatory policies supporting efficient investment paths with zero expected profits as subgame perfect Nash equilibria, but these policies must under-reward capital in some states of the world. Carefully designed nonlinear price regulation can improve on these equilibrium outcomes, although at higher consumer costs, and only if state-contingent transfers are feasible.


Newbery, D and R Gilbert (1988), ‘DP267 Regulation Games‘, CEPR Discussion Paper No. 267. CEPR Press, Paris & London. https://cepr.org/publications/dp267