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Carrot And Yardstick Regulation: Enhancing Market Performance With Output Prizes

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  • BAGNOLI, M.
  • BORENSTEIN, S.

Abstract

The fundamental objective of most regulatory mechanisms is to expand output at a sufficiently low cost to consumers. Many useable mechanisms, such as Loeb and Magat's, require detailed demand information and substantial profit recapture by the regulator in order to achieve this objective. We present an apparently unexplored alternative approach--inducing competition among firms for shares of a monetary reward. Payments to a firm for output expansion thus depend on both its own behavior and the actions of other firms, which can even be firms in unrelated industries. We show that in a wide variety of circumstances, the resultant increase in consumer surplus exceeds the reward. Hence, even with no profit recapture, our approach can lead to Pareto improvements. Copyright 1991 by Kluwer Academic Publishers
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Suggested Citation

  • Bagnoli, M. & Borenstein, S., 1988. "Carrot And Yardstick Regulation: Enhancing Market Performance With Output Prizes," Papers 89-01, Michigan - Center for Research on Economic & Social Theory.
    • Handle: RePEc:fth:michet:89-01
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    Cited by:

    1. Haldun Evrenk & E. Zenginobuz, 2010. "Regulation through a revenue contest," Journal of Economics, Springer, vol. 99(3), pages 211-237, April.
    2. Kim, Jae-Cheol & Lee, Sang-Ho, 1995. "An optimal regulation in an intertemporal oligopoly market: The Generalized Incremental Surplus Subsidy (GISS) scheme," Information Economics and Policy, Elsevier, vol. 7(3), pages 225-249, September.
    3. Pereira Neto, Caio Mário da Silva & Casagrande, Paulo Leonardo & Lancieri, Filippo Maria & Porto Moraes, Joaquim Nogueira, 2016. "Pro-competition rules in airport privatization: International experience and the Brazilian case," Journal of Air Transport Management, Elsevier, vol. 54(C), pages 9-16.
    4. Marques, Rui Cunha, 2006. "A yardstick competition model for Portuguese water and sewerage services regulation," Utilities Policy, Elsevier, vol. 14(3), pages 175-184, September.

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    Keywords

    enterprises ; consumers;

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