A. GARY ANDERSON
GRADUATE SCHOOL OF MANAGEMENT
CENTER FOR SOCIALLY RESPONSIBLE ORGANIZATIONS
RESEARCH SEMINAR SERIES
Stephen Regan
Stephen Regan
Cranfield School of Management
Cranfield University (UK)
Rational Bankruptcy in Regulated Utilities - A real
problem, a credible threat and cheap talk
A model is presented which predicts that it is rational for a
regulated firm to create a positive risk of bankruptcy by
excessively high levels of gearing, in order to extract a higher
price (ie a price above Short run marginal social cost) than the
official rules of the game allow. As such this is a model of capture
with the (perhaps interesting) property that it is rational for the
regulator to allow all three of these departures from the welfare
optimum. One of the main predictions of the model is that issuing
debt will prevent the regulator from acting opportunistically by
reducing prices during a regulatory period. Equally, allowing the
firm to issue debt, may be a commitment by the regulator not to
reduce prices later. The intuition is that the regulator tradesoff
static welfare for a dynamic gain of increased investment, which is
otherwise underincentivised, in a risky, price capped environment.
There are empirical phenomena in both the UK and California which
suggests that such a model is timely. The paper concludes with
certain indications of explicit empirical work which could usefully
test its validity before any policy implications may be drawn.
Friday, April 13, 2001, 11 am-12:30 pm
Room 021, Anderson Hall, UC Riverside
Copies of the
paper to be presented are available at
http://www.goldmark.org/livia/misc/regan.rtf or from Prof.
Lívia Markóczy,
Livia.Markoczy@ucr.edu, Anderson Hall, Rm 221, 787-3908
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