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Rent Extraction and Incentives for Efficiency in Recent Regulatory Proposals

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  • Gasmi, F
  • Ivaldi, M
  • Laffont, Jean Jacques

Abstract

Building on a simple model proposed by Schmalensee (1989), this paper uses simulation techniques to analyze and compare various regulatory schemes including Schmalensee's family of (linear) "good" regulatory regimes, a price-cap regime allowing for downward price flexibility, and a regime that combines price-cap and profit sharing. The quantitative analysis pays particular attention to measuring the trade-off between rent extraction and incentives for efficiency. The main findings of this study can be summarized as follows: First, it appears that pure price-cap regulation leaves substantial rent to the firm relative to the other regimes. Second, introducing room for downward price flexibility improves efficiency of price-cap over Schmalensee's linear regulatory regimes. Finally, by correcting in part for the distributional distortion of price-cap, the profit-sharing mechanism often yields levels of welfare comparable to optimal regulation levels. Copyright 1994 by Kluwer Academic Publishers

Suggested Citation

  • Gasmi, F & Ivaldi, M & Laffont, Jean Jacques, 1994. "Rent Extraction and Incentives for Efficiency in Recent Regulatory Proposals," Journal of Regulatory Economics, Springer, vol. 6(2), pages 151-176, May.
  • Handle: RePEc:kap:regeco:v:6:y:1994:i:2:p:151-76
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    Cited by:

    1. David Hawdon & Lester C. Hunt & Paul Levine & Neil Rickman, 2007. "Optimal sliding scale regulation: an application to regional electricity distribution in England and Wales," Oxford Economic Papers, Oxford University Press, vol. 59(3), pages 458-485, July.
    2. Bousquet, Alain & Ivaldi, Marc, 1997. "Optimal pricing of telephone usage: An econometric implementation," Information Economics and Policy, Elsevier, vol. 9(3), pages 219-239, September.
    3. Iossa, Elisabetta & Stroffolini, Francesca, 2002. "Price cap regulation and information acquisition," International Journal of Industrial Organization, Elsevier, vol. 20(7), pages 1013-1036, September.
    4. Harvey James & Derek Johnson, 2002. "Understanding Regulatory Environments and their Impact on Economic Change," Industrial Organization 0202001, EconWPA.
    5. Jose Luis Lima R & Andres Gomez Lobo, 2004. "Good Regulatory Lags for Price Cap and Rolling Cap contracts," Econometric Society 2004 Latin American Meetings 278, Econometric Society.
    6. Weisman, Dennis L., 2002. "Is there 'Hope' for price cap regulation?," Information Economics and Policy, Elsevier, vol. 14(3), pages 349-370, September.
    7. Jean-Jacques Laffont, 2000. "Information et économie publique," Économie et Prévision, Programme National Persée, vol. 145(4), pages 107-115.
    8. Philippe Gagnepain, 2001. "La nouvelle théorie de la régulation des monopoles naturels : fondements et tests," Post-Print hal-00622947, HAL.
    9. Francesca Stroffolini, 2009. "Access Profit-Sharing Regulation with Information Transmission and Acquisition," CSEF Working Papers 214, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
    10. Armstrong, Mark & Sappington, David E.M., 2007. "Recent Developments in the Theory of Regulation," Handbook of Industrial Organization, Elsevier.
    11. Iossa, Elisabetta & Stroffolini, Francesca, 2005. "Price cap regulation, revenue sharing and information acquisition," Information Economics and Policy, Elsevier, vol. 17(2), pages 217-230, March.
    12. Dalen, Dag Morten & Gomez-Lobo, Andres, 1997. "Estimating cost functions in regulated industries characterized by asymmetric information," European Economic Review, Elsevier, vol. 41(3-5), pages 935-942, April.

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