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Rate-of-Return Regulation, Price-Cap Regulation, and Quality

Author

Listed:
  • Kidokoro. Y.

Abstract

We build a simple model with quality, show that price-cap (PC) regulation causes distorsions in quality compared to rate-of-return (ROR) regulation. We next consider methods to correct this distortion, and show the following results: (i) PC regulation, in which the cap is made contingent on quality, can correct the quality distortion without distorting cost-reducing efforts, (ii) PC regulation, in which the cap depends on investment, also corrects the quality distortion but distorts cost-reducing efforts. We illustrate these results by simulation.

Suggested Citation

  • Kidokoro. Y., 1995. "Rate-of-Return Regulation, Price-Cap Regulation, and Quality," ISER Discussion Paper 0446, Institute of Social and Economic Research, Osaka University.
    • Handle: RePEc:dpr:wpaper:0446
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    Keywords

    REGULATION;

    JEL classification:

    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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