Production Competition in Electricity Sector: Social Welfare vs. Managerial Incentives in a Partially Regulated Duopoly

Abstract

We study production competition between two electricity producers, where one of them is subject to a nationalization decision and the other is a private producer that chooses managerial incentives to counter governmental actions. The government wants to maximize a modified form of social welfare and chooses partial nationalization, which still has a serious impact on the rival private producer. We find, that by offering managerial incentives the private producer recovers its lost profit and induces even less nationalization. We also find that such equilibrium might produce the same level of social welfare than one without incentives.