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Regulating without Cost Information: The Incremental Surplus Subsidy Scheme

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Author Info
Sappington, David E M
Sibley, David S

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Abstract

The authors propose a regulatory mechanism, called the incremental surplus subsidy (ISS) scheme, that can be implemented even when the regulato r has no knowledge of the monopolist's cost structure. The regulator need only share the firm's knowledge of demand (which may be imperfec t) and be able to observe (with a lag) the firm's expenditures. The I SS scheme induces the firm to set marginal cost prices, to minimize p roduction costs, and to undertake efficient investment levels. It als o severely limits the firm's rents, and eliminates them altogether if the firm's discount rate is known. Copyright 1988 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

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Article provided by Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association in its journal International Economic Review.

Volume (Year): 29 (1988)
Issue (Month): 2 (May)
Pages: 297-306
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Handle: RePEc:ier:iecrev:v:29:y:1988:i:2:p:297-306

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  2. Paul L Joskow, 2005. "Incentive Regulation In Theory And Practice - Electricity Distribution And Transmission Networks," Working Papers 0514, Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research. [Downloadable!]
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  3. Francois Melese & David Kaserman & John Mayo, 1996. "A dynamic model of advertising by the regulated firm," Journal of Economics, Springer, vol. 64(1), pages 85-106, February. [Downloadable!] (restricted)
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  5. Ingo Vogelsang, 2005. "Electricity Transmission Pricing and Performance-Based Regulation," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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  6. Abhijit Sengupta & Yair Tauman, 2004. "Inducing Efficiency in Oligopolistic Markets with Increasing Returns to Scale," Department of Economics Working Papers 04-05, Stony Brook University, Department of Economics. [Downloadable!]
  7. William P. Rogerson, 1993. "Inter-temporal Cost Allocation and Managerial Investment Incentives," Discussion Papers 1060, Northwestern University, Center for Mathematical Studies in Economics and Management Science. [Downloadable!]
  8. Makoto TANAKA, 2005. "Optimal Transmission Capacity under Nodal Pricing and Incentive Regulation for Transco," Discussion papers 05021, Research Institute of Economy, Trade and Industry (RIETI). [Downloadable!]
  9. E. Wolfstetter, . "Regulation of Monopoly," Sonderforschungsbereich 373 1996-37, Humboldt Universitaet Berlin.
  10. Valerio Gatta & Edoardo Marcucci, 2007. "Quality and Public Transport Service Contracts," Working Papers 0708, University of Urbino Carlo Bo, Department of Economics, revised 2007. [Downloadable!]
  11. Hassan Benchekroun & Ngo Van Long, 1997. "Efficiency Inducing Taxation for Polluting Oligopolists," CIRANO Working Papers 97s-21, CIRANO. [Downloadable!]
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