Asymmetric Information, Incentives and Price-Cap Regulation
AbstractA 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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Bibliographic InfoArticle provided by The RAND Corporation in its journal RAND Journal of Economics.
Volume (Year): 20 (1989)
Issue (Month): 3 (Autumn)
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Web page: http://www.rje.org
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- Luis Ángel Herrera & Juan Rosellón, 2013. "On Distributive Effects of Optimal Regulation for Power Grid Expansion," Discussion Papers of DIW Berlin 1327, DIW Berlin, German Institute for Economic Research.
- 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.
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