Price-Cap versus Rate-of-Return Regulation in a Stochastic-Cost Model
AbstractA stochastic-cost model is used to show that both price-cap and rate-of-return regulation lead to overinvestment in capital and to excessive managerial slack. However, they differ in stochastic versus fixed intervals between hearings and in the use of test-year costs versus average costs since the previous hearing. A numerical example illustrates that fixed intervals between hearings improve welfare if hearings are not held too frequently, but most gains go to the firm. More significantly, the use of average-cost data combined with fixed intervals results in dramatic welfare improvements, with most gains going to consumers.
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Bibliographic InfoArticle provided by The RAND Corporation in its journal RAND Journal of Economics.
Volume (Year): 23 (1992)
Issue (Month): 4 (Winter)
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Web page: http://www.rje.org
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- Bernstein, Jeffrey I & Sappington, David E M, 1999.
"Setting the X Factor in Price-Cap Regulation Plans,"
Journal of Regulatory Economics,
Springer, vol. 16(1), pages 5-25, July.
- Jeffrey I. Bernstein & David E. M. Sappington, 1998. "Setting the X Factor in Price Cap Regulation Plans," NBER Working Papers 6622, National Bureau of Economic Research, Inc.
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