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Regulatory Options and Price-Cap Regulation


  • Tracy R. Lewis
  • David E.M. Sappington


We construct a simple model of the regulatory process in which a monopoly firm has private information about its capabilities and its cost-reducing activities. The optimal regulatory policy offers the firm a choice between two regulatory regimes, one of which resembles price-cap regulation. The other regime has the firm share realized gains in surplus with consumers. We examine the optimal linking of the two regimes and show how the optimal regulatory policy varies with changes in the technological climate in the industry and with the nature of the information asymmetry between regulator and firm.

Suggested Citation

  • Tracy R. Lewis & David E.M. Sappington, 1989. "Regulatory Options and Price-Cap Regulation," RAND Journal of Economics, The RAND Corporation, vol. 20(3), pages 405-416, Autumn.
  • Handle: RePEc:rje:randje:v:20:y:1989:i:autumn:p:405-416

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    References listed on IDEAS

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    Cited by:

    1. Paul L. Joskow, 2014. "Incentive Regulation in Theory and Practice: Electricity Distribution and Transmission Networks," NBER Chapters,in: Economic Regulation and Its Reform: What Have We Learned?, pages 291-344 National Bureau of Economic Research, Inc.
    2. 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.
    3. Larry Blank & John Mayo, 2009. "Endogenous Regulatory Constraints and the Emergence of Hybrid Regulation," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 35(3), pages 233-255, November.
    4. Philippe Gagnepain & Marc Ivaldi, 2002. "Incentive Regulatory Policies: The Case of Public Transit Systems in France," RAND Journal of Economics, The RAND Corporation, vol. 33(4), pages 605-629, Winter.
    5. Josh Lerner, 2005. "150 Years of Patent Office Practice," American Law and Economics Review, Oxford University Press, vol. 7(1), pages 112-143.
    6. Luigi Benfratello & Alberto Iozzi & Paola Valbonesi, 2009. "Technology and incentive regulation in the Italian motorways industry," Journal of Regulatory Economics, Springer, vol. 35(2), pages 201-221, April.
    7. Iossa, Elisabetta & Stroffolini, Francesca, 2002. "Price cap regulation and information acquisition," International Journal of Industrial Organization, Elsevier, vol. 20(7), pages 1013-1036, September.
    8. Erdogdu, Erkan, 2005. "Energy market reforms in Turkey: An economic analysis," MPRA Paper 26929, University Library of Munich, Germany.
    9. Enzo Defilippi, 2013. "X-factor estimation and controversies : the case of Lima´s airport," Working Papers 13-09, Centro de Investigación, Universidad del Pacífico.
    10. Defilippi, Enzo, 2015. "X-factor regulation in a developing country: The case of Lima's airport," Transport Policy, Elsevier, vol. 41(C), pages 16-22.
    11. Armstrong, Mark & Sappington, David E.M., 2007. "Recent Developments in the Theory of Regulation," Handbook of Industrial Organization, Elsevier.

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