Seminar: Roland Strausz, Humboldt University, Berlin.

Title: Regulatory Risk under Optimal Incentive Regulation.

I develop a tractable framework to study regulatory risk under optimal monopoly regulation. It captures increasing regulatory risk as mean preserving spreads of two regulatory variables: weights attached to profits and costs of public funds. The regulator’s reaction to regulatory risk depends on the curvature of demand. For convex (concave) demand, it yields a positive (negative) information rent effect that benefits(hurts) the firm. Consumers dislike a positive information rent effect but their risk preferences depend also on their tendency to dislike fluctuations in consumption. Risk preference of benevolent regulators may contradict both the firm’s and consumers’.