PRICE CAPS AND ELECTORAL CYCLES

Abstract

This paper presents a model about the behavior of politicians in tariff reviews within the context of price cap regulation with different hypothesis of the election calendar. We address both the cases of backward and forward looking voters. The model shows that there is a natural tendency, when voters are backwardlooking, for politicians to be relatively more populist when price cap reviews occur just before elections and relatively more pro-entrepreneur when these reviews occur just after elections. This can make the politician’s rule closer or not to the rule attributed to the benevolent regulator. For originally populist politicians, it would be better to have price cap reviews happening just after elections, while for pro-entrepreneur politicians, it would be preferable to have price caps occurring just before elections. On the other hand, we also show that when voters are forward-looking, politicians always tend to be more pro-entrepreneur. The political independence of the regulator matters relatively more when voters are forward-looking and in specific combinations of election timing and politicians original preferences toward consumers and firms.