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Asymmetric Information, Incentives and Price-Cap Regulation


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  • David Sibley
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    A regulatory incentive mechanism is presented in which the regulated firm has superior information about both cost and demand, compared to the regulator. The mechanism leads to truthful revelation of the demand function and extracts all rents due to private demand information in a nondistorting way. The scheme assumes that the regulator can observe lagged expenditures by the firm. This mechanism leads to efficient pricing, operating, and investment behavior by the firm. Finally, it is shown that the mechanism is closely related to recent proposals for price-cap regulation and that under certain assumptions simple modifications of these proposals will lead to the mechanisms discussed herein.

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    Article provided by The RAND Corporation in its journal RAND Journal of Economics.

    Volume (Year): 20 (1989)
    Issue (Month): 3 (Autumn)
    Pages: 392-404

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    Handle: RePEc:rje:randje:v:20:y:1989:i:autumn:p:392-404

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    Cited by:
    1. William P. Rogerson, 1993. "Inter-temporal Cost Allocation and Managerial Investment Incentives," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 1060, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    2. Lantz, Björn, 2009. "The double marginalization problem of transfer pricing: Theory and experiment," European Journal of Operational Research, Elsevier, Elsevier, vol. 196(2), pages 434-439, July.
    3. Majumdar, Sumit K., 2010. "Institutional changes, firm size and wages in the telecommunications sector," Information Economics and Policy, Elsevier, Elsevier, vol. 22(3), pages 201-217, July.
    4. Powell, Kirsty & Szymanski, Stefan, 1997. "Regulation through comparative performance evaluation," Utilities Policy, Elsevier, Elsevier, vol. 6(4), pages 293-301, December.
    5. Anne Neumann & Juan Rosellón & Hannes Weigt, 2011. "Removing Cross-Border Capacity Bottlenecks in the European Natural Gas Market: A Proposed Merchant-Regulatory Mechanism," Discussion Papers of DIW Berlin, DIW Berlin, German Institute for Economic Research 1145, DIW Berlin, German Institute for Economic Research.
    6. Juan Rosellon & Luis Herrera, 2013. "On Distributive Effects of Optimal Regulation for Power Grid Expansion," Working papers, CIDE, División de Economía DTE 563, CIDE, División de Economía.
    7. Lantz, Björn, 2008. "Hybrid revenue caps and incentive regulation," Energy Economics, Elsevier, Elsevier, vol. 30(3), pages 688-695, May.
    8. Ramirez, Jose Carlos & Rosellon, Juan, 2002. "Pricing natural gas distribution in Mexico," Energy Economics, Elsevier, Elsevier, vol. 24(3), pages 231-248, May.
    9. Li Ning, Jorge, 2009. "Second-degree price discrimination and universal access under (weighted average) price cap regulation," MPRA Paper 31321, University Library of Munich, Germany.
    10. Lantz, Bjorn, 2007. "A non-Bayesian piecewise linear approximation adjustment process for incentive regulation," Information Economics and Policy, Elsevier, Elsevier, vol. 19(1), pages 95-101, March.
    11. Luigi Benfratello & Alberto Iozzi & Paola Valbonesi, 2005. "Privatisation, regulation and productivity in the Italian motorway industry," "Marco Fanno" Working Papers, Dipartimento di Scienze Economiche "Marco Fanno" 0002, Dipartimento di Scienze Economiche "Marco Fanno".
    12. 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, Elsevier, vol. 7(3), pages 225-249, September.


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