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Tradeoffs in the Power of Regulatory Regimes

Author

Listed:
  • Weisman Dennis L.

    (Department of Economics, Kansas State University, Waters Hall, Manhattan, KS 66506-4001, USA)

Abstract

Performance-based regulation (PBR) has recently experienced increased popularity in North America and Europe. The genesis for this renewed interest in PBR is the potential to strengthen the regulated firm’s incentives for efficiency relative to traditional rate-of-return regulation. The strength of these incentives is referred to as the power of the regulatory regime (PRR). The PRR depends on the share of the efficiency gains retained by the regulated firm and the length of time that it retains them before being appropriated by the regulator acting as a surrogate for competition. Nonetheless, there are tradeoffs in the design of PBR plans that can render it inferior to traditional earning-based regulation in terms of incentive power. This may explain why the empirical evidence on the performance of PBR is best characterized as “mixed.”

Suggested Citation

  • Weisman Dennis L., 2024. "Tradeoffs in the Power of Regulatory Regimes," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 24(2), pages 339-359, April.
    • Handle: RePEc:bpj:bejeap:v:24:y:2024:i:2:p:339-359:n:10
    DOI: 10.1515/bejeap-2023-0244
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    More about this item

    Keywords

    power of regulatory regimes; price caps; ratchet effect; earnings sharing; efficiency;
    All these keywords.

    JEL classification:

    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L96 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Telecommunications

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