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Mechanisms for Incentive Regulation: Theory and Experiment

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  • James C. Cox
  • R. Mark Isaac

Abstract

This article develops the theoretical properties of a new incentive mechanism for regulating a monopoly seller and reports the results of laboratory experimental tests of its behavioral properties. The design of the new mechanism draws upon the results of our earlier experimental research on the behavioral properties of two other mechanisms, one by Loeb and Magat (1979) and a second by Finsinger and Vogelsang (1981). As with Finsinger and Vogelsang, the new mechanism weakens Loeb and Magat's requirement that regulators have complete knowledge of market demand. The new mechanism, however, is not subject to the destabilizing, profit-destroying cycles of nonoptimal behavior observed with Finsinger and Vogelsang's.

Suggested Citation

  • James C. Cox & R. Mark Isaac, 1987. "Mechanisms for Incentive Regulation: Theory and Experiment," RAND Journal of Economics, The RAND Corporation, vol. 18(3), pages 348-359, Autumn.
    • Handle: RePEc:rje:randje:v:18:y:1987:i:autumn:p:348-359
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    Cited by:

    1. Jim Engle-Warnick & Bradley Ruffle, 2002. "Buyer Countervailing Power versus Monopoly Power: Evidence from Experimental Posted-Offer Markets," Economics Papers 2002-W14, Economics Group, Nuffield College, University of Oxford.
    2. Kevin Currier, 2005. "Strategic Firm Behavior Under Average-Revenue-Lagged Regulation," Journal of Regulatory Economics, Springer, vol. 27(1), pages 67-79, September.
    3. Dasgupta Utteeyo, 2011. "Are Entry Threats Always Credible?," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 11(1), pages 1-41, December.
    4. Lantz, Bjorn, 2007. "A non-Bayesian piecewise linear approximation adjustment process for incentive regulation," Information Economics and Policy, Elsevier, vol. 19(1), pages 95-101, March.
    5. Matt Essen, 2014. "A Clarke tax tâtonnement that converges to the Lindahl allocation," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 43(2), pages 309-327, August.
    6. Sherman, Roger, 1989. "Institutional design for monopoly regulation," European Journal of Political Economy, Elsevier, vol. 5(2-3), pages 245-257.
    7. Laffont, Jean-Jacques, 1994. "The New Economics of Regulation Ten Years After," Econometrica, Econometric Society, vol. 62(3), pages 507-537, May.
    8. Matt Van Essen, 2013. "Regulating the Anticommons: Insights from Public‐Expenditure Theory," Southern Economic Journal, John Wiley & Sons, vol. 80(2), pages 523-539, October.
    9. Leroux, Anke & Söderberg, Magnus, 2023. "Network Regulation under electoral competition," Energy Economics, Elsevier, vol. 120(C).

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