Optimal Rate Base Reviews Under Price-Cap Regulation

Giuseppe Coco () and Claudio De Vincenti

Departmental Working Papers from Tor Vergata University, CEIS

Abstract: This paper demonstrates, in a dynamic model of monopoly regulation with price-cap, that a periodical price review may increase productive efficiency. When the firm’s choice of cost-reducing effort depends on the output supplied, a revision allows the regulator to set more binding prices thus inducing the monopolist to exert more cost-reducing effort in the future. In a continuous-time setting, we find the optimal timing for the review from a cost-efficiency point of view and the conditions under which, within a given concession period, a single full rate base review improves cost-efficiency and by this route the optimal number of reviews. This number depends on the length of the concession period in relation to the slope of the demand function and the intensity of the disutility of effort. This result adds a theoretical argument in favour of the practice of periodical reviews in price-cap regulation and provides regulators with a basis for calculation of the optimal regulatory lag. JEL classification: L 51, D42

Keywords: Price-cap; Rate base review. (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mic and nep-reg
Date: 2005-11

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Persistent link: http://EconPapers.repec.org/RePEc:rtv:ceiswp:223

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