IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Opting-out in profit-sharing regulation

  • Michele Moretto

    (University of Brescia)

  • Paola Valbonesi

    (University of Padova)

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.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://128.118.178.162/eps/io/papers/0403/0403002.pdf
Download Restriction: no

Paper provided by EconWPA in its series Industrial Organization with number 0403002.

as
in new window

Length: 40 pages
Date of creation: 03 Mar 2004
Date of revision:
Handle: RePEc:wpa:wuwpio:0403002
Note: Type of Document - pdf; pages: 40; figures: 3 figures, imported and attached at the end of the paper
Contact details of provider: Web page: http://128.118.178.162

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.:

as in new window
  1. 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.
  2. Weisman, Dennis L, 1993. "Superior Regulatory Regimes in Theory and Practice," Journal of Regulatory Economics, Springer, vol. 5(4), pages 355-66, December.
  3. Klein, D.B., 1991. "A Game-Theoretic rendering of Promises and Threats," Papers 90-91-21, California Irvine - School of Social Sciences.
  4. Simon, Leo K & Stinchcombe, Maxwell B, 1989. "Extensive Form Games in Continuous Time: Pure Strategies," Econometrica, Econometric Society, vol. 57(5), pages 1171-1214, September.
  5. Steven Shavell & Kathryn Spier, 1996. "Threats without Binding Commitment," NBER Working Papers 5461, National Bureau of Economic Research, Inc.
  6. 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.
  7. Panteghini, Paolo & Carlo Scarpa, 2002. "Incentives to (irreversible) investments under different regulatory regimes," Royal Economic Society Annual Conference 2002 154, Royal Economic Society.
  8. 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.
  9. Armstrong, M. & Cowan, S. & Vickers, J., 1992. "Nonlinear Pricing and Price Cap Regulation," Economics Series Working Papers 99152, University of Oxford, Department of Economics.
  10. 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.
  11. Lyon, Thomas P, 1996. "A Model of Sliding-Scale Regulation," Journal of Regulatory Economics, Springer, vol. 9(3), pages 227-47, May.
  12. 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.
  13. 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.
  14. 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.
  15. 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.
  16. 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.
  17. Lucy Chennells, 1997. "The windfall tax," Fiscal Studies, Institute for Fiscal Studies, vol. 18(3), pages 279-291, August.
  18. 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.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:wpa:wuwpio:0403002. 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 you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.