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A Little Paradox in the Design of Regulatory Mechanisms

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  • Vogelsang, Ingo

Abstract

Several incentive mechanisms have been suggested in the literature to induce regulated monopolists to choose welfare-maximiz ing prices and cost levels for their services. Among the desirable pr operties of such mechanisms is that their application should be contr ollable by third parties ("verifiability"). A mechanism recently de signed by Sappington and Sibley (1988), incremental surplus subsidy, which is otherwise ideal in its properties, fails to be verifiable. A verifiable crude first-order approximation to this mechanism retains some, but lacks other, of the nice properties possessed by increment al surplus subsidy. This paper therefore analyzes closer (second-orde r) approximations to incremental surplus subsidy. Paradoxically, thes e approximations in a crucial sense are shown to perform worse than t he cruder approximation. 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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Bibliographic Info

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): 3 (August)
Pages: 467-76

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Handle: RePEc:ier:iecrev:v:29:y:1988:i:3:p:467-76

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Cited by:
  1. repec:ebl:ecbull:v:3:y:2007:i:12:p:1-10 is not listed on IDEAS
  2. Prieger, James E. & Sanders, Nicholas J., 2012. "Verifiable and non-verifiable anonymous mechanisms for regulating a polluting monopolist," Journal of Environmental Economics and Management, Elsevier, vol. 64(3), pages 410-426.
  3. Kim, Jae-Cheol & Lee, Sang-Ho, 1995. "An optimal regulation in an intertemporal oligopoly market: The Generalized Incremental Surplus Subsidy (GISS) scheme," Information Economics and Policy, Elsevier, vol. 7(3), pages 225-249, September.
  4. Georg Meran & Christian von Hirschhausen, 2006. "A Modified Yardstick Competition Mechanism," Working Papers 2006-05, Center for Network Industries and Infrastructure (CNI).
  5. Koray, Semih & Saglam, Ismail, 1997. "Justifiability of Bayesian Implementation in Oligopolistic Markets," MPRA Paper 4459, University Library of Munich, Germany.
  6. Lantz, Björn, 2008. "Hybrid revenue caps and incentive regulation," Energy Economics, Elsevier, vol. 30(3), pages 688-695, May.
  7. Lantz, Bjorn, 2007. "A non-Bayesian piecewise linear approximation adjustment process for incentive regulation," Information Economics and Policy, Elsevier, vol. 19(1), pages 95-101, March.
  8. Ingo Vogelsang, 2005. "Electricity Transmission Pricing and Performance-Based Regulation," CESifo Working Paper Series 1474, CESifo Group Munich.

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