A Little Paradox in the Design of Regulatory Mechanisms
AbstractSeveral 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 InfoArticle 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)
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- Prieger, James E. & Sanders, Nicholas J., 2012.
"Verifiable and non-verifiable anonymous mechanisms for regulating a polluting monopolist,"
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- James E. Prieger & Nicholas J. Sanders, 2011. "Verifiable and Non-Verifiable Anonymous Mechanisms for Regulating a Polluting Monopolist," Discussion Papers 10-034, Stanford Institute for Economic Policy Research.
- 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.
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- Lantz, Björn, 2008. "Hybrid revenue caps and incentive regulation," Energy Economics, Elsevier, vol. 30(3), pages 688-695, May.
- 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.
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