Incentive Regulation and the Regulation of Incentives.pdf

Incentive Regulation and the Regulation of Incentives PDF

Glenn Blackmon

The class is theory of price regulation assumed that the regulator knows the fIrms costs, the key piece of information that enables regulators to pressure fmns to choose appropriate behaviors. The regulatory problem was reduced to a mere pricing problem: the regulators goal was to align price with marginal cost, subject to the constraint that revenues must cover costs. Elegant and important insights ensued. The most important was that regulation was inevitably a struggle to achieve second-best outcomes. (Ramsey pricing was a splendid example. ) Reality proved harsh to regulatory theory. The fmns costs are by no means known to the regulator. At best, the regulator may know how much is currently spent to provide services, but hardly what costs would be if the fmn vigorously pursued effIciency. Even if the current cost curve were known to the regulator, technologies change so swiftly that todays costs are a very poor indicator of tomorrows, and those are the costs that will determine the fIrms future decisions. With the burgeoning attention to information considerations and game theory in economics, the regulators problem of eliciting host information about cost has received considerable attention. In most cases, however, it has been in context that are both static and stylized

30 Jan 2014 ... Balancing Strong Incentives against. Consumer Interests. PURC, University of Florida 3. Definition. Incentive regulation is the use of. rewards ... Advantages / Disadvantages. ◦ Exogenous costs. ◦ Inflation indices. ◦ X factor. ▻ Performance Based Regulation. ▻ Specific Incentives. Order of presentation ...

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Incentive Regulation and the Regulation of Incentives.pdf


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