Opting-out in profit-sharing regulation
To avoid the extremely high profit levels found in recent experiences with price cap regulation, some regulators have proposed a profit-sharing mechanism that revises prices to the benefit of consumers. This paper investigates the conditions under which a regulator can implement such a profit-sharing scheme, having the option to revoke the contract if the firm's profits are excessive. When this option is included in the regulator's objective function and the cost of exercising it is not too high, a long-term equilibrium arises with a state-contingent sharing rule that guarantees and appropriate level of profits. The model determines both the level of profits that triggers the profit- sharing mechanism and the consequent price adjustment endogenously. There is an endogenous regulatory lag initially characterized by a price cap regulation, followed by a period of profit-sharing regime where the firm is motivated to cut prices to avoid revocation.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Crew, Michael A & Kleindorfer, Paul R, 1996. "Incentive Regulation in the United Kingdom and the United States: Some Lessons," Journal of Regulatory Economics, Springer, vol. 9(3), pages 211-25, May.
- Harrison, J. Michael & Kreps, David M., 1979. "Martingales and arbitrage in multiperiod securities markets," Journal of Economic Theory, Elsevier, vol. 20(3), pages 381-408, June.
- Lyon, Thomas P, 1996.
"A Model of Sliding-Scale Regulation,"
Journal of Regulatory Economics,
Springer, vol. 9(3), pages 227-47, May.
- Mark Armstrong & Simon Cowan & John Vickers, 1994. "Regulatory Reform: Economic Analysis and British Experience," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262510790, June.
- Armstrong, M. & Cowan, S. & Vickers, J., 1992.
"Nonlinear Pricing and Price Cap Regulation,"
Economics Series Working Papers
99152, University of Oxford, Department of Economics.
- Michele Moretto & Paolo M. Panteghini & Carlo Scarpa, 2003.
"Investment Size and Firm’s Value Under Profit Sharing Regulation,"
2003.80, Fondazione Eni Enrico Mattei.
- Michele Moretto & Paolo Panteghini & Carlo Scarpa, 2003. "Investment Size and Firm's Value under Profit Sharing Regulation," CESifo Working Paper Series 1040, CESifo Group Munich.
- Bergin, James & MacLeod, W Bentley, 1993. "Continuous Time Repeated Games," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 34(1), pages 21-37, February.
- Panteghini, Paolo & Carlo Scarpa, 2002.
"Incentives to (irreversible) investments under different regulatory regimes,"
Royal Economic Society Annual Conference 2002
154, Royal Economic Society.
- Carlo Scarpa & Paolo Panteghini, 2001. "Incentives to (Irreversible) Investments Under Different Regulatory Regimes," CESifo Working Paper Series 417, CESifo Group Munich.
- Paul L. Joskow, 2006. "Incentive Regulation for Electricity Networks," CESifo DICE Report, Ifo Institute for Economic Research at the University of Munich, vol. 4(2), pages 3-9, 07.
- Klein, Daniel B. & O'Flaherty, Brendan, 1993.
"A game-theoretic rendering of promises and threats,"
Journal of Economic Behavior & Organization,
Elsevier, vol. 21(3), pages 295-314, August.
- Klein, D.B., 1991. "A Game-Theoretic rendering of Promises and Threats," Papers 90-91-21, California Irvine - School of Social Sciences.
- Brennan, Timothy J & Boyd, James, 1997.
"Stranded Costs, Takings, and the Law and Economics of Implicit Constracts,"
Journal of Regulatory Economics,
Springer, vol. 11(1), pages 41-54, January.
- Brennan, Timothy & Boyd, James, 1996. "Stranded Costs, Takings, and the Law and Economics of Implicit Contracts," Discussion Papers dp-97-02, Resources For the Future.
- Weisman, Dennis L, 1993. "Superior Regulatory Regimes in Theory and Practice," Journal of Regulatory Economics, Springer, vol. 5(4), pages 355-66, December.
- Simon, Leo K & Stinchcombe, Maxwell B, 1989.
"Extensive Form Games in Continuous Time: Pure Strategies,"
Econometric Society, vol. 57(5), pages 1171-1214, September.
- Simon, Leo K. & Stinchcombe, Maxwell B., 1987. "Extensive From Games in Continuous Time: Pure Strategies," Department of Economics, Working Paper Series qt03x115sh, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
- Leo K. Simon and Maxwell B. Stinchcombe., 1987. "Extensive Form Games in Continuous Time: Pure Strategies," Economics Working Papers 8746, University of California at Berkeley.
- Steven Shavell & Kathryn Spier, 1996.
"Threats without Binding Commitment,"
NBER Working Papers
5461, National Bureau of Economic Research, Inc.
- 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.
- Lucy Chennells, 1997. "The windfall tax," Fiscal Studies, Institute for Fiscal Studies, vol. 18(3), pages 279-291, August.
- McDonald, Robert & Siegel, Daniel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, MIT Press, vol. 101(4), pages 707-27, November.
- Ephraim Clark & Gérard Mondello, 2000. "Resource Management and the Mayor's Guarantee in French Water Allocation," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 15(2), pages 103-113, February.
When requesting a correction, please mention this item's handle: RePEc:wpa:wuwpio:0403001. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (EconWPA)
If references are entirely missing, you can add them using this form.