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Optimal Price-Cap Regulation

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  • Clemenz, Gerhard

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.

Suggested Citation

  • Clemenz, Gerhard, 1991. "Optimal Price-Cap Regulation," Journal of Industrial Economics, Wiley Blackwell, vol. 39(4), pages 391-408, June.
    • Handle: RePEc:bla:jindec:v:39:y:1991:i:4:p:391-408
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    Cited by:

    1. 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.
    2. 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.
    3. Oliver, Matthew E., 2019. "Pricing flexibility under rate-of-return regulation: Effects on network infrastructure investment," Economic Modelling, Elsevier, vol. 78(C), pages 150-161.
    4. Cullmann, Astrid & Nieswand, Maria, 2016. "Regulation and investment incentives in electricity distribution: An empirical assessment," Energy Economics, Elsevier, vol. 57(C), pages 192-203.
    5. Weisman, Dennis L., 2002. "Is there 'Hope' for price cap regulation?," Information Economics and Policy, Elsevier, vol. 14(3), pages 349-370, September.
    6. Cullmann, Astrid & Nieswand, Maria, 2015. "Regulation and Investment Incentives in Electricity Distribution," VfS Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 113090, Verein für Socialpolitik / German Economic Association.
    7. Joan Calzada & Francesc Trillas, 2005. "The interconnection prices in telecomunications: from theory to practice," Hacienda Pública Española / Review of Public Economics, IEF, vol. 173(2), pages 85-125, June.
    8. 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.
    9. James Reitzes, 2008. "Downstream price-cap regulation and upstream market power," Journal of Regulatory Economics, Springer, vol. 33(2), pages 179-200, April.
    10. Müller, Christine & Growitsch, Christian & Wissner, Matthias, 2010. "Regulierung und Investitionsanreize in der ökonomischen Theorie. IRIN Working Paper im Rahmen des Arbeitspakets: Smart Grid-gerechte Weiterentwicklung der Anreizregulierung," WIK Discussion Papers 349, WIK Wissenschaftliches Institut für Infrastruktur und Kommunikationsdienste GmbH.
    11. 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.
    12. D. Giannakis & T. Jamasb & M. Pollitt, 2003. "Benchmarking and Incentive Regulation of Quality of Service: an Application to the UK Electricity Distribution Utilities," Working Papers EP35, Energy Policy Research Group, Cambridge Judge Business School, University of Cambridge.
    13. Heyes, Anthony G. & Liston-Heyes, Catherine, 1998. "Price-cap regulation and technical change," Journal of Public Economics, Elsevier, vol. 68(1), pages 137-151, April.
    14. Dierk Bauknecht, 2011. "Incentive Regulation and Network Innovations," RSCAS Working Papers 2011/02, European University Institute.
    15. Armstrong, Mark & Sappington, David E.M., 2007. "Recent Developments in the Theory of Regulation," Handbook of Industrial Organization, in: Mark Armstrong & Robert Porter (ed.), Handbook of Industrial Organization, edition 1, volume 3, chapter 27, pages 1557-1700, Elsevier.

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