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Evaluating the Performance of Non-Bayesian Regulatory Mechanisms

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  • Lyon, Thomas P

Abstract

This paper compares the performance of two prominent non-Bayesian regulatory mechanisms: Sappington and Sibley's (1988) Incremental Surplus Subsidy (ISS) and Hagerman's (1990) refinement of the Vogelsang-Finsinger (1979) mechanism. The two mechanisms are shown to induce identical, non-zero levels of "abuse"--unproductive expenses that benefit the firm--though neither induces pure waste. ISS pareto-dominates the Hagerman mechanism when lump-sum transfers to the firm are non-distortionary, but the Hagerman mechanism generates greater welfare and consumer surplus when the distortionary effects of transfers are large. For a wide range of intermediate parameter values, the quantitative difference in performance between the two mechanisms is surprisingly modest. Copyright 1996 by Kluwer Academic Publishers

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  • Lyon, Thomas P, 1996. "Evaluating the Performance of Non-Bayesian Regulatory Mechanisms," Journal of Regulatory Economics, Springer, vol. 9(1), pages 41-60, January.
    • Handle: RePEc:kap:regeco:v:9:y:1996:i:1:p:41-60
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    Cited by:

    1. Ingo Vogelsang, 2006. "Electricity Transmission Pricing and Performance-based Regulation," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 97-126.
    2. Semih Koray & Ismail Saglam, 2005. "The Need for Regulating a Bayesian Regulator," Journal of Regulatory Economics, Springer, vol. 28(1), pages 5-21, July.

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