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Regulatory Incentive Policies and Abuse

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  • Sappington, David E M
  • Sibley, David S

Abstract

We examine the incentives for abuse under rate-of-return (ROR) and incremental surplus subsidy (ISS) regulation. Abuse consists of expenditures by the regulated firm that provide private benefits, but do not reduce production costs. We show that ISS regulation provides efficient incentives for owners of the regulated firm to limit abuse by subordinates. We also prove that abuse by owners of the firm will generally be greater (smaller) under ROR regulation than under ISS regulation when consumer demand for the regulated product is inelastic (elastic). Furthermore, we show that to limit abuse and improve welfare under ROR regulation, it can be advantageous to "ignore" available information about consumer demand. Copyright 1993 by Kluwer Academic Publishers

Suggested Citation

  • Sappington, David E M & Sibley, David S, 1993. "Regulatory Incentive Policies and Abuse," Journal of Regulatory Economics, Springer, vol. 5(2), pages 131-141, June.
    • Handle: RePEc:kap:regeco:v:5:y:1993:i:2:p:131-41
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    Cited by:

    1. Prieger, James E. & Sanders, Nicholas J., 2012. "Verifiable and non-verifiable anonymous mechanisms for regulating a polluting monopolist," Journal of Environmental Economics and Management, Elsevier, vol. 64(3), pages 410-426.
    2. Sappington, David E. M. & Weisman, Dennis L., 1996. "Revenue sharing in incentive regulation plans," Information Economics and Policy, Elsevier, vol. 8(3), pages 229-248, September.
    3. Sang‐Ho Lee, 2006. "Welfare‐Improving Privatization Policy In The Telecommunications Industry," Contemporary Economic Policy, Western Economic Association International, vol. 24(2), pages 237-248, April.
    4. Armstrong, Mark & Sappington, David E.M., 2007. "Recent Developments in the Theory of Regulation," Handbook of Industrial Organization, in: Mark Armstrong & Robert Porter (ed.), Handbook of Industrial Organization, edition 1, volume 3, chapter 27, pages 1557-1700, Elsevier.

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