Time Consistency in Regulatory Price Setting: An Australian Case Study

Time consistency refers to situations where a policy that is optimal ex ante proves not to be optimal ex post, creating the risk of opportunistic policy reversals. While the threat of such reversals has received widespread attention in the theoretical literature, testing whether policy is indeed time consistent is challenging. This paper implements such a test by comparing the depreciation profile established by the Australian telecommunications regulator at the outset of a regulatory period with the actual path of allowed recovery, and finds that the regulator acted in a time-inconsistent manner.