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Asymmetric Information, Incentives and Price-Cap Regulation

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  • David Sibley
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    Abstract

    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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    Bibliographic Info

    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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    Web page: http://www.rje.org

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    Cited by:
    1. 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 1145, DIW Berlin, German Institute for Economic Research.
    2. 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.
    3. Ramirez, Jose Carlos & Rosellon, Juan, 2002. "Pricing natural gas distribution in Mexico," Energy Economics, Elsevier, vol. 24(3), pages 231-248, May.
    4. Lantz, Björn, 2008. "Hybrid revenue caps and incentive regulation," Energy Economics, Elsevier, vol. 30(3), pages 688-695, May.
    5. Powell, Kirsty & Szymanski, Stefan, 1997. "Regulation through comparative performance evaluation," Utilities Policy, Elsevier, vol. 6(4), pages 293-301, December.
    6. 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.
    7. Majumdar, Sumit K., 2010. "Institutional changes, firm size and wages in the telecommunications sector," Information Economics and Policy, Elsevier, vol. 22(3), pages 201-217, July.
    8. Lantz, Björn, 2009. "The double marginalization problem of transfer pricing: Theory and experiment," European Journal of Operational Research, Elsevier, vol. 196(2), pages 434-439, July.
    9. Herrera, Luis Ángel & Rosellón, Juan, 2014. "On distributive effects of optimal regulation for power grid expansion," Energy Policy, Elsevier, vol. 69(C), pages 189-204.
    10. 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.
    11. 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.
    12. Luigi Benfratello & Alberto Iozzi & Paola Valbonesi, 2005. "Privatisation, regulation and productivity in the Italian motorway industry," "Marco Fanno" Working Papers 0002, Dipartimento di Scienze Economiche "Marco Fanno".

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