Dynamic Natural Monopoly Regulation: Time Inconsistency, Moral Hazard, and Political Environments


This paper quantitatively assesses time inconsistency, moral hazard, and political ideology in monopoly regulation of electricity distribution. We specify and estimate a dynamic model of utility regulation featuring investment and moral hazard. We find under-investment in electricity distribution capital aiming to reduce power outages, and use the estimated model to quantify the value of regulatory commitment in inducing greater investment. Furthermore, more conservative political environments grant higher regulated returns, but have higher rates of electricity loss. Using the estimated model, we quantify how conservative regulators thus mitigate welfare losses due to time inconsistency, but worsen losses from moral hazard. 

Cornell University
Friday, March 10, 2017 - 13:00
Sala de Consejo, Beauchef 851, floor 4 - Departamento de Ingeniería Industrial, Universidad de Chile