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Optimal Price Cap Regulation

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  • Gerhard CLEMENZ

Abstract

The author considers the problem of a regulator who cannot observe the R&D expenditures of a firm devoted to reductions in the costs of production. It is shown, for a finite horizon model, that price-cap regulation does not only provide stronger incentives for cost reductions than does rate of return regulation, but that it is also capable of achieving a higher social welfare level, even if the costs of reviewing the current production costs are negligible. These conclusions are reinforced in an infinite horizon model. Copyright 1991 by Blackwell Publishing Ltd.
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Suggested Citation

  • Gerhard CLEMENZ, 1999. "Optimal Price Cap Regulation," Vienna Economics Papers vie8904, University of Vienna, Department of Economics.
  • Handle: RePEc:vie:viennp:vie8904
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    Cited by:

    1. T. Jamasb & R. Nepal, 2015. "Issues and Options in the Economic Regulation of European Network Security," Competition and Regulation in Network Industries, Intersentia, vol. 16(1), pages 2-23, March.
    2. Cullmann, Astrid & Nieswand, Maria, 2016. "Regulation and investment incentives in electricity distribution: An empirical assessment," Energy Economics, Elsevier, vol. 57(C), pages 192-203.
    3. Joan Calzada & Francesc Trillas, 2005. "The interconnection prices in telecomunications: from theory to practice," Hacienda Pública Española, IEF, vol. 173(2), pages 85-125, June.
    4. Giannakis, Dimitrios & Jamasb, Tooraj & Pollitt, Michael, 2005. "Benchmarking and incentive regulation of quality of service: an application to the UK electricity distribution networks," Energy Policy, Elsevier, vol. 33(17), pages 2256-2271, November.
    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. Cullmann, Astrid & Nieswand, Maria, 2015. "Regulation and Investment Incentives in Electricity Distribution," Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 113090, Verein für Socialpolitik / German Economic Association.
    7. James Reitzes, 2008. "Downstream price-cap regulation and upstream market power," Journal of Regulatory Economics, Springer, vol. 33(2), pages 179-200, April.
    8. Nykamp, Stefan & Andor, Mark & Hurink, Johann L., 2012. "‘Standard’ incentive regulation hinders the integration of renewable energy generation," Energy Policy, Elsevier, vol. 47(C), pages 222-237.
    9. Giannakis, D. & T. Jamasb & Pollitt, M.G., 2004. "Benchmarking and incentive regulation of quality of service: an application to the UK electricity distribution utilities," Cambridge Working Papers in Economics 0408, Faculty of Economics, University of Cambridge.
    10. Dierk Bauknecht, 2011. "Incentive Regulation and Network Innovations," RSCAS Working Papers 2011/02, European University Institute.
    11. Armstrong, Mark & Sappington, David E.M., 2007. "Recent Developments in the Theory of Regulation," Handbook of Industrial Organization, Elsevier.

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