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Faculty of Economics

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Grey, F., Ritz, R.

Pass-through, profits and the political economy of regulation

CWPE1859

Abstract: Government regulation, such as the pricing of externalities, often raises the unit costs of regulated firms, and its impact on their profits is important to its political economy. We introduce a reduced-form model (“GLM”) that nests existing models of imperfect competition under weaker assumptions. We show how a firm's cost passthrough is a sufficient statistic for the profit impact of regulation. We apply the GLM to carbon pricing for US airlines. We find large inter-firm heterogeneity in pass-through, even for a uniform cost shock. The GLM allows us to sidestep estimation of a consumer demand system, firm markups and conduct parameters. We derive the second-best emissions tax including lobbying a government “for sale”.

Keywords: Cost pass-through, regulation, carbon pricing, airlines, political economy

JEL Codes: D43 H23 L51 L92 Q54

Author links: Robert Ritz  

PDF: http://www.econ.cam.ac.uk/research-files/repec/cam/pdf/cwpe1859.pdf

EPRG Paper Link: 1831

Open Access Link: https://doi.org/10.17863/CAM.33797