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Motivating cost reduction in regulated industries with rolling incentive schemes

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  • Turner, Douglas C.
  • Sappington, David E.M.

Abstract

We examine whether an incremental rolling incentive scheme (IRIS) can enhance innovation under performance based regulation (PBR). Under an IRIS, the firm is awarded for a full PBR term the incremental profit generated by a cost reduction regardless of when the cost reduction is implemented. An IRIS enhances incentives for innovation toward the end of a PBR plan and also ensures immediate implementation of achieved cost reductions. However, an IRIS can reduce incentives for innovation early in a PBR plan. On balance, an IRIS often reduces innovation when the regulated firm has limited ability to delay the implementation of achieved cost reductions. More generally, an IRIS can enhance innovation.

Suggested Citation

  • Turner, Douglas C. & Sappington, David E.M., 2025. "Motivating cost reduction in regulated industries with rolling incentive schemes," Energy Economics, Elsevier, vol. 151(C).
    • Handle: RePEc:eee:eneeco:v:151:y:2025:i:c:s0140988325007431
    DOI: 10.1016/j.eneco.2025.108916
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L97 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Utilities: General
    • O38 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Government Policy

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