We develop a theoretical model of long-run investment decisions on capacity in the context of a liberalized electricity … the level of capacity that maximizes social welfare, and compare it to a decentralized outcome. We show that in the … absence of any regulation, private investment decisions on capacity unambiguously lead to a socially sub-optimal outcome, and …

a model in which facilities can produce output at a privately known cost up to a previously-determined capacity level …. In such a model, the amount of slack in the firm is shown to be pro-cyclical. Indeed, as capacity constraints become … capacity. …

pecuniary benefits: higher prices lead to more integration. Because tariffs increase domestic product prices, this effect … trade-off between the pecuniary benefits of coordinating production decisions and the managers’ private benefits of … the predictions of our model, we obtain three main results. First, higher tariffs lead to higher levels of vertical …