This project consists of four parts. Three deal with industrial organization issues. The fourth is more foundational. The first part studies politics in government decision-making and develops an agency-theoretic approach to the theory of regulatory capture. It explores the effect of politics on the regulated firms' incentives and pricing, and looks at regulatory institutions (constraints on regulatory instruments, hearings). The second part prepares a monograph on incentives and pricing, competition, dynamics and politics of regulation. The third part looks at the possibility of foreclosing an unregulated market through vertical integration and examines the antitrust implications. The fourth part constructs a general concept of Markov Perfect Equilibrium and studies its properties. This is important because the Markov Perfect Equilibrium is used to study many different types of economic problems. The research on the politics of regulation is especially exciting because it develops an original and very promising approach to government intervention in industry. The vast majority of theoretical studies of regulation assume that the government is a benevolent social planner who corrects inefficiencies such as monopoly pricing and environmental externalities. Unfortunately, this is a very unrealistic assumption. Government agencies can adopt inefficient policies because of the pressure of special interest groups. The goal of this project is to develop a theory of politics in regulation that captures the interplay among the government agency, the regulated firms and the consumer groups (environmentalists, consumers of the goods produced by the firm, and the taxpayers). The interest groups have different costs of organization. The theory is used to prove general theorems about the effects of different institutions on the behavior of regulators. This project should be supported because it provides useful insights into the politics of regulation and into industrial organization and antitrust. The project also produces a monograph on regulation that makes the large number of publications written for specialists in regulation economics accessible to a wider audience. Finally, it develops a general solution concept that should prove useful in applications of game theory to economic problems.
