Why Less May Be More under Price-Cap Regulation

Dennis L Weisman

Journal of Regulatory Economics, 1994, vol. 6, issue 4, 339-61

Abstract: The incentive regulation literature has focused on how to discipline the regulated firm. Here, in the Chicago School tradition, we consider how price-cap regulation might enable the firm to discipline the regulator. We show that under quite general conditions, the firm will prefer profit-sharing to pure price-cap regulation under which it retains one hundred percent of its profits. Profit-sharing limits the incentives of the regulator to take actions adverse to the firm's financial interests. The discipline imposed on the regulator results in a more profitable regulatory environment for the firm. Copyright 1994 by Kluwer Academic Publishers

Date: 1994
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